InvestmentsSep 5 2016

Steady income sees sector’s star on rise

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Steady income sees sector’s star on rise

But while property has struggled, infrastructure has gained favour among investors thanks to its stable income flows and protection against inflation.

Figures from QuotedData show that even before the UK decided to vote for Brexit, infrastructure was stepping into the spotlight among investment trust investors.

In the second quarter of 2016, specialist property and infrastructure companies dominated the fundraising scene, with the infrastructure sector, not including renewable energy, raising approximately £427m in the second quarter of the year compared with roughly £262m in the first three months of 2016, according to the data provider.

Year to date to August 18, the AIC Infrastructure sector has returned 16.8 per cent, according to data from FE Analytics, outperforming the AIC Property – Securities sector gain of 9.2 per cent and the AIC Property – Direct UK fall of 2 per cent. The specialist AIC Infrastructure – Renewable Energy sector also performed well in the period with a gain of 6.2 per cent.

The underlying assets provide essential services and the business models are simple to understand Peter Meany, First State Investments

But while it has performed better than its traditional property counterparts, Peter Meany, head of global infrastructure securities at First State Investments, suggests investors have been attracted to infrastructure for its defensive qualities.

He explains: “The underlying assets provide essential services and the business models are simple to understand. Infrastructure also offers growth that is more structural than cyclical, and pricing power which can provide a hedge to inflation or deflation.”

Darius McDermott, managing director of FundCalibre, agrees that infrastructure investment is “ticking a lot of boxes” as these assets tend to provide core services and facilities. He points out these can range from large-scale projects such as power networks, railways and roads, to smaller, but equally essential, structures such as GP surgeries.

“Importantly, they generate cashflows that are not dependent on wider economic conditions. Earnings are typically resilient and predictable. So there is some protection from inflation – which has just started to pick up and the yield can be attractive – again an important element at the moment when interest rates are at 0.25 per cent and cash savings rates are being slashed,” says Mr McDermott.

As the Bank of England looks near the limit of its powers to boost the economy with monetary policy, many are predicting fiscal policy – in particular increased infrastructure spending – could be one route to growth for the new government.

Theresa May has already raised the idea of ‘infrastructure bonds’ and the March update to the UK’s National Infrastructure Delivery Plan 2016-2021 shows the pipeline for UK projects is estimated to be worth £425bn from 2016-17 onwards, of which £297.3bn is focused on the next five years to 2020-21.

Therefore, with government spending potentially on the increase, it is not surprising investors looking for yield are seeking alternatives and, with more funds coming to market – such as the recently launched Legg Mason IF Rare Global Infrastructure Income fund – accessibility is improving.

Commenting on the Legg Mason launch, Tom Jemmett, fund analyst at Brewin Dolphin, notes: “We’ve been investing in listed infrastructure for some time now as we feel the sector offers a more liquid and diversified route than investing directly, while offering the potential for good capital growth with inflation-protected income. Notwithstanding the defensive qualities a strategy tilted towards regulated global utilities should bring, we like the RARE fund as it helps diversify our current exposure while providing an income premium.”

Mr McDermott adds: “The Legg Mason Rare fund has a yield of 5 per cent, and invests globally. The 13-strong specialist investment team places a heavy emphasis on certainty of future revenues. I also like VT UK Infrastructure Income, which launched earlier this year, and only invests in UK infrastructure. About two-thirds of the fund invests in investment trusts exposed to different types of infrastructure and the rest is in direct equities. It also holds some infrastructure fixed income. It has a yield of 5 per cent.”

Although the Autumn Statement is not due for a few more months, there are still plenty of encouraging signs that infrastructure will continue to gain favour from the more income-hungry investors.

Nyree Stewart is features editor at Investment Adviser