The best time to invest in infrastructure

Peter Meany, head of global listed infrastructure at First State Investments, says: “Listed infrastructure, with its combination of inflation-protected income and steady capital growth, offers a way of bridging the gap between bonds and equities.”

First State believes infrastructure funds can be very effective income providers as cash flows are often highly predictable as the sector’s long-term contracts and limited cyclicality means dividends tend to be highly secure.

“Crucially, infrastructure assets have the ability to consistently increase the price of their services over time,” Mr Meany adds.

This yield on listed infrastructure is not only competitive with cash, he suggests, but also has the potential to increase in line with (or above) inflation.

“The listed infrastructure sector is forecast to yield approximately 4 per cent. Importantly, this income has grown at 6 per cent per annum over the last five years.”

But adviser Neil Shillito, director at SG Wealth Management, argues that these are not suitable funds for investors chasing income.

“These are predominantly growth-oriented funds paying little or no yield overall, although individual stock holdings – such as utilities – may pay competitive dividends. Investors should look elsewhere for yield.”

Darius McDermott, managing director of Chelsea Financial Services, counters that while yields on equity-linked funds are somewhat lower, those from infrastructure funds investing directly in assets “are generally quite strong”.

Mr McDermott believes now is a good time for the sector. “Infrastructure funds can look attractive in the context of government plans, and more broadly, within a ‘yield-hunt’ environment.

In recent budgets the UK government has announced a number of infrastructure projects which have boosted interest in this sector.”

Mr Meany sees a number of themes in the year ahead that should be supportive of infrastructure continuing to deliver strong absolute and relative returns.

“One of these is that elections or leadership transitions have occurred in many of the major economies including the US, France, China and Japan. Political stability is likely to reduce uncertainty through better public policy.

“This should help remove the discounts currently placed on some infrastructure businesses, such as French utility company GDF Suez, which has been hit by new taxes, gas tariff deficits and generation closures in recent years.”

A second theme relates to inflation. As pricing of infrastructure services is generally linked to inflation – either explicitly through direct contractual links or implicitly through strong pricing power – infrastructure provides a natural hedge to rising inflation and the uncertainty it creates.

Mr Meany concludes: “Overall, infrastructure valuations remain supportive given below-trend multiples, low interest rates, medium-term earnings upside and premiums paid by unlisted investors.”