Access to infrastructure investments has improved in recent years, with a number of recently launched closed and open-ended funds being dedicated to the sector.
Both approaches have their pros and cons to the extent that the investment choice is dependent on the attitude and preference of the client regarding the type of infrastructure exposure they require.
Rob Burdett, co-head of multi-manager at F&C Investments, explains: “In general terms the open-ended infrastructure funds tend to invest in listed equities. That tends to mean there are limits to the kind of infrastructure they can get involved with. It is generally things like utilities, but if as an investor you have other investments in other equity funds, you may already have exposure to utilities or these kinds of areas.”
Instead he suggests that if investors are looking to diversify, specialist closed-ended vehicles that invest in actual infrastructure contracts provide a better diversifier.
However, Peter Meany, head of global listed infrastructure at First State Investments, says listed-infrastructure assets have their own advantages, including being traded on global stockmarkets and being able to construct a more liquid and diversified portfolio of assets.
But he adds: “The disadvantage of the listed approach is that an investor would own only a small part of any given asset, and have less control over how each of the companies in its portfolio was run, than a fund investing in direct infrastructure would have over an asset that it owned entirely. Another factor is that direct infrastructure assets tend to have more stable observed returns than listed infrastructure assets because direct assets are valued at periodic intervals, typically semi-annually.”
Ian Rees, head of research at Premier Multi-Asset funds, points out that while infrastructure is a wide term that covers a breadth of investment, the asset class can effectively be broken down into two main types, economic and social.
“What you’ve seen emerging in the past eight years, particularly in the UK market, is social infrastructure such as schools, hospitals, court houses and prisons. Historically governments have funded those types of project, but they are now trying to incentivise more private money.”
Mr Rees highlights the UK market has now seen a number of vehicles launched that are dedicated to taking advantage of the PFI model, including HICL, John Laing, Bilfinger Berger and International Public Partnership (IPP).
“In total these vehicles have raised approximately £4.4bn of capital between them. It is an established sector now. The size of these vehicles on their own and collectively mean some investors have become more aware of them,” he adds.
Mr Burdett has taken the closed-end approach with exposure to both 3i Infrastructure and International Public Partnership. “When we’ve seen bouts of volatility in markets, infrastructure assets tend to perform better than the open-ended infrastructure funds in terms of helping with volatility. Obviously the flipside is that to buy something like 3i, you have to go into the market and pay the price on the day. There may be a premium if they’re in demand so you may see returns a little bit compromised by the premium.”
The main advantage to investing in social infrastructure, usually at the operational rather than construction and planning stages, is the steady cashflows.
Szymon Idzikowski, closed-end fund analyst at Morningstar, points out the three main areas of focus regarding infrastructure investment relate to income, correlation to equity markets and diversification.
“One of the great benefits of infrastructure is it provides a return profile very similar to fixed income and real estate investment. Most of the returns are income returns so you’ve got greater reliability and you’ve got more predictable cashflows. They are at least partially hedged for inflation and the earnings tend to be much more defensive, so they are less impacted by economic cycles.
“Correlation is where the difference actually starts. If you invest in listed assets they will behave more like traditional listed equities so the correlation benefit is not that great. When you look at closed-end funds against traditional indices the correlation is very low or even negative.”
But he adds that unlisted infrastructure investments are often large projects that require large monetary commitments, meaning closed-ended funds can have less diversified portfolios.
“You can’t say one is better than the other, they give slightly different flavours.”
With the number of infrastructure funds of both types continuing to grow it looks like that clients will be spoilt for choice and will have to decide what type of exposure they require.
Nyree Stewart is deputy features editor at Investment Adviser
