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Fund Review: Infrastructure

Introduction

Performance is part of the attraction, with Peter Meany, head of global infrastructure securities at First State Investments, pointing out that a number of infrastructure sectors have delivered greater than 20 per cent returns (in local currency terms) in the past 12 months.

He adds: “The dividends paid by electric, gas and water utilities have become more attractive in a low-bond-yield environment. Despite re-rating, many utilities still offer 3-4 per cent yields, plus dividend growth of 5-6 per cent reflecting investment into gas pipelines and renewable energy. Mobile towers benefit from the strong demand for mobile data and the resulting need for telecom operators to upgrade.

“Airports have enjoyed increased airline seat capacity due to lower fuel prices, on top of the structural growth from rising middle-class wealth in countries like China. Takeovers were also a source of returns for listed infrastructure investors as unlisted infrastructure, pension and sovereign wealth funds have been prepared to pay premiums of 30 per cent or more to accumulate these scarce assets.”

FUND PICKS

CF CanLife Globlal Infrastructure

One of the smaller vehicles in the sector at just £11m, this open-ended fund was launched in 2013 and is managed by Dave Gill and Pei Li. It aims to achieve long-term capital growth by investing in the shares of infrastructure companies around the globe. For the three years to August 18, it has delivered a steady 33.5 per cent return while the one-year performance is equally strong at 22.2 per cent. The largest sector weighting is to utilities at 41.7 per cent, while North America is the largest geographical weighting at 46.4 per cent.

GCP Infrastructure Investments

This Jersey-domiciled investment trust was launched in July 2010 and has a market cap of approximately £708m, as of the end of June. It focuses on investments in completed infrastructure projects with “long-term, public-sector-backed, availability-based revenues”, although it can invest up to 25 per cent of its net assets in investments that do not meet these criteria. For the three years to August 18 the trust delivered a return of 43.5 per cent, against the AIC Infrastructure sector average of 44.4 per cent. The portfolio’s largest project exposure is to PFI at 26 per cent, while a further 22 per cent is allocated to rooftop solar.

EDITOR’S PICK

HICL Infrastructure

Managed by InfraRed Capital Partners, this Guernsey-listed investment company was launched in 2006 and has a market cap of approximately £2.4bn as of June 30. One of the few infrastructure vehicles with a 10-year track record, the investment company has returned 178 per cent for the 10 years to August 18 compared with the AIC Infrastructure sector average of 64.9 per cent. The strategy focuses on assets at the “lower end of the risk spectrum”, such as schools, hospitals and public buildings.

The MSCI ACWI Infrastructure index has outperformed the MSCI AC World index year to date to August 18 with gains of 26.8 per cent and 20 per cent respectively, according to FE Analytics data.

Meanwhile the AIC Infrastructure sector has delivered a return of 16.8 per cent for the year to date to August 18 compared with 9.2 per cent from the AIC Property – Securities sector and a loss of 2 per cent in the AIC Property – Direct UK sector.

It is not surprising, then, that multi-asset investors are among those taking advantage of the stable income stream and strong performance in an environment of low interest rates and uncertain global growth.

In a recent outlook, Eugene Philalithis, portfolio manager, Fidelity Multi Asset Income, notes: “In growth assets, we have been rotating away from social infrastructure assets to renewable infrastructure assets. The former performed strongly post-Brexit, with premiums to their net asset values (NAVs) trading at all-time highs. Renewables are trading closer to their NAVs and could benefit from higher gas prices feeding into a rebound for electricity prices.”

Rory McPherson, head of investment strategy at Psigma, points out in a recent blog post that a shift away from austerity now looks likely, which means more spend on infrastructure.

“This will provide a useful tailwind to infrastructure companies, [making it] a favourable time to invest in these assets,” he adds. “A stimulus package [is] expected in the Autumn statement, if not before. These measures would boost spending expectations. Much of this spend will likely be on transportation and other stuff that drives growth: roads, rail, schools and housing, to name but a few.”

Darius McDermott, managing director at FundCalibre, concludes: “The sector tends to be less volatile than the wider market, can protect against inflation and offers good income. As infrastructure spend is likely to increase too, it’s no wonder investment trusts in this sector are trading on high premiums.”

In this special report