How to get exposure to the infrastructure story

Many of these offer the seductive combination of a stable, inflation-proofed yield and capital preservation. But it has become a crowded trade with more people taking an interest in the asset class. Do the numbers still add up for infrastructure funds and, if so, what are the best ways to invest?

There are two main types of infrastructure fund – direct and equity-based. Direct funds invest in ‘real’ infrastructure projects, such as the building of schools or hospitals. They will vary in the extent to which they target UK or international opportunities and also in the extent to which they target ‘mature’ opportunities (lower risk), or projects at an earlier, more capital intensive stage. The majority of these are structured as investments trusts to manage the liquidity constraints.

Equity-based funds target infrastructure-linked listed companies such as Wolseley. Performance will be more closely correlated with the equity market, but these funds are often defensive in nature and offer a steady and consistent yield. The First State Listed Infrastructure fund, for example, has a yield of 2.7 per cent and has not had a negative calendar year of performance since 2008.

On the periphery there are also a number of funds aiming to tap into infrastructure investment in emerging markets, such as the Utilico Emerging Market investment trust, or the Invesco Asian Infrastructure fund. While these sound like a good idea in principle – after all, many emerging market governments are directing vast sums towards infrastructure projects – only a handful have been profitable for investors.

The Invesco Asian Infrastructure fund is down 19.5 per cent based on five-year performance data, while the higher risk African and Indian infrastructure investment trusts have lost greater sums for investors. The Utilico trust stands out as a top performer, having delivered a net asset value return of 44.3 per cent in five years.

In general, fund selectors have chosen investment trusts over open-ended funds and UK-focused funds over international funds. The appeal with closed-end funds such as investment trusts is that they are less likely to suffer due to the relatively poor liquidity of the underlying asset class.

John Dance, branch principal of Vertem Asset Management, says: “We use HICL Infrastructure fund. This invests in post-completion projects. This means that investors are not funding the build and construction where there might be more capital growth, but is more risk... we buy it for its income stream, but we use it across most of our portfolios.”

Justin Oliver, investment director at Collins Stewart Wealth Management, says: “We use direct infrastructure as opposed to listed infrastructure because it is lowly correlated with other asset classes. The recurring income and inflation-adjusted income stream is also attractive.”

The problem with closed-end funds is that they have become a victim of their own success. HICL has a dividend yield of 5.5 per cent, on – in many cases – government-backed infrastructure assets such as hospitals and schools. With income in high demand, the fund’s shares now trade at a premium of 7.5 per cent (February 27) to the value of its assets.

Simon Moore, senior research analyst at Bestinvest, is comfortable with the premium. He says: “We like the PFI infrastructure trusts where there’s a legal document with the government saying it will always pick up the tab.

“We’ve seen that tested when one of the NHS trusts in South London went bust and the government had to carry on paying the PFI dividends. If these trusts are backed by the government, these are like gilts. And so if they’re trading at 6 per cent and it’s a gilt, I’ll buy some of that, rather than the gilts which are currently yielding 3 per cent or less.”

Mr Oliver admits it is a problem, but says that trusts such as HICL are taking diluting measures. HICL recently had a £120m fundraising, which allowed investors in at net asset value.

David Hambidge, head of multi-asset investment at Premier Asset Management, says that he is still supporting the asset class, but believes it is becoming a crowded trade and the trusts premium to net asset value should cause concern.

On the open-ended side, Peter Toogood, investment services director for Morningstar OBSR, says that the First State Listed Infrastructure fund is the best in the sector, calling Peter Meany a ‘good sensible fund manager’. However, he admits that the closed-ended structure is usually a better way to hold these longer duration assets.

Infrastructure has provided all those qualities of stability and a steady income at a time when that was exactly what investors wanted. This has been profitable for existing holders, but the sector’s charms should not blind investors to the price they are paying for those assets.

Cherry Reynard is a freelance journalist