Infrastructure plays vital role for future

In the UK, the National Infrastructure Plan outlines a pipeline of infrastructure products representing more than £375bn of public and private investment. An update on the plan’s financing published in March shows that 64 per cent of the planned projects are solely funded by the private sector.

This perhaps goes some way to explaining the growing appetite for infrastructure investing. There are currently four open-ended vehicles focused on infrastructure listed in the IMA sectors, but the majority of investment vehicles are to be found in the AIC sectors, which house 12 infrastructure investment companies, including 3i Infrastructure, HICL Infrastructure and John Laing Infrastructure.

Overall, the performance of these companies is pretty strong, although there is a range of performances. The GCP Infrastructure Investments trust delivered a top-ranking, 12-month return of 14.12 per cent to June 26, compared with the loss of 50 per cent from the Bloomsbury Infrastructure India trust in the same period, according to FE Analytics data.

This clearly highlights the necessity of knowing exactly what you’re invested in. For example, the £238m Lazard Global Listed Infrastructure Equity fund aims to focus on the pattern of returns rather than infrastructure for the sake of it.

It seeks assets that tend to be long-lived, have predictable cashflow characteristics and an element of inflation-proofing, and therefore the portfolio sits towards the lower end of the risk spectrum.

Manager Bertrand Cliquet explains: “It is very clear we are targeting the lower end of the risk spectrum. So some of the risks we are seeking to remove include those around construction risk and companies that are exposed to market forces or commodity price movements.”

In terms of trends in the infrastructure sector the manager notes there is some valuation risk in the asset class, as investors have sought more and more yield.

But he adds: “In the past few months, I would call it a normalisation on several fronts. First, normalisation around Europe, not just restricted to infrastructure, but some areas were seen as no-go territories by investors – they’ve come back and the share price has appreciated to a degree.

“There is also normalisation around North American stocks, and the tapering process should help address the overvaluation we see with a lot of assets in the US. The biggest valuation risk is in the US and Canada – those safe haven countries where infrastructure assets have been rerated to levels never seen before.”

Looking ahead, however, another potential key trend for the infrastructure sector is a renewed focus on renewable energy and climate change.

In June the UK Green Investment Bank announced plans to raise a new £1bn fund to encourage private investors to back offshore wind farms in the UK.

The bank’s annual results show it committed £668m to 18 new green projects in 2013-14, which combined with £1.9bn of private money invested in the projects, means £2.5bn was invested in the UK’s ‘green’ economy in 2013-14.

Since its inception in 2012, the bank states that approximately £4.8bn has been ploughed into UK green infrastructure projects.

That said, the bank acknowledges that roughly 88 per cent of the investments remain in construction, so while the portfolio is expected to earn taxpayers and investors an average return of 8 per cent a year once the projects are completed, it recorded an operating loss of £5.7m in the current year.

Shaun Kingsbury, chief executive of the Green Investment Bank, says: “Our role goes well beyond that of a traditional investor.

“We are providing a positive demonstration by successfully committing capital to profitable, green infrastructure investments. We are making a difference across the UK by taking on the tough projects, de-risking new technologies and lowering the cost of capital for our sectors.”

But with economic recovery still fragile, the focus on green and renewable infrastructure could get passed over in favour of projects with a more tangible impact, such as roads, railways and communications.

With the UK general election now less than a year away, it will be interesting to see how much of a factor infrastructure and the green agenda will play.

Nyree Stewart is features editor at Investment Adviser