Infrastructure is a theme that has certainly been capturing the headlines recently. As the monetary policies of the central banks have become less effective, there has been a shift towards fiscal policies to support the global economy. Through an increase in government spending, the authorities have attempted to improve unemployment rates, fight against deflation, stabilise business cycles and influence interest rates. One way of achieving the economic Holy Grail is by investing in long-term infrastructure projects.
This shift in policy has been widespread and gained momentum quickly. Following last year's vote to leave the EU, the chancellor Philip Hammond hinted that the government would be prepared to increase borrowing to plough into infrastructure projects to generate growth and help the economy adjust to the ‘shock’ of Brexit.
But it is not just at home where the authorities could be looking towards infrastructure to generate growth. In Europe and Japan, the European Central Bank and the Bank of Japan have both recently mentioned that looser fiscal policy may be required to boost economic growth. However, the election of Donald Trump in the US has generated the most interest, with one of his biggest undertakings to "make America great again" being seen as spending big to regenerate the country’s dilapidated infrastructure
Such a shift in economic policy has been a key driver of the recent resurgence of interest in the asset class. So what are the key issues to consider if looking to add exposure to client portfolios.
When thinking of infrastructure, the first things that come to mind are roads, railways and airports. Infrastructure investing is about transportation networks, of course, but it is far broader and nuanced than that.
Infrastructure is also about those assets that provide essential services and facilities necessary for a society and economy to function. These assets include hospitals, schools, power generation and delivery, and more recently satellite communications and mobile towers. These are essential socio-economic assets, most of which are either financially backed or regulated by governments.
There are two defined approaches to invest in infrastructure. First, is investing in vehicles that will have direct exposure to infrastructure projects; because of the long-term and illiquid nature of infrastructure assets such exposure is gained via closed-ended investment trusts. Such trusts will typically be focused towards public finance initiatives and public private partnerships whereby public infrastructure projects are financed by private funding.
The other route is through the stock market, where equity investors can get access to this area of investment through listed infrastructure beneficiaries. Funds investing in listed infrastructure will focus on companies involved in provision of toll roads, airports, ports, railroads, utilities, pipelines, satellite and mobile towers. This route is more accessible and provides more liquidity and transparency than investing directly in infrastructure projects.
There are a wide number of compelling reasons for investing in infrastructure:
• Income generation: infrastructure assets tend to be cash generative and so tend to produce regular, stable income distributions, an attractive prospect in this lower for longer interest rate environment and this has been a key driver in the increased desirability of the sector.
• Resilience to the economic cycle: infrastructure projects are generally used to provide vital services, whose usage means they are resilient and stable during periods of economic downturns. This non-cyclical element has been sought after in a climate of low global growth.