Investors swayed by sector’s unique traits

There are currently seven Investment Association (IA) listed infrastructure funds, and roughly 15 closed-ended Association of Investment Companies (AIC) listed vehicles, with the AIC Sector Specialist: Infrastructure sector delivering an average three-year share price total return to January 31 2017 of 41.9 per cent. This was second only to the Property Direct: Asia Pacific sector average of 44.1 per cent among the property and infrastructure sectors. 

Jemma Jackson, PR manager at the AIC, explains: “From a property perspective it seems likely that the problems experienced by the open-ended property funds following the UK’s referendum result have made advisers more aware of the benefits of holding illiquid assets like property in a closed-ended structure, where managers can take a long-term view without worrying about having to sell stock to meet redemptions, and as a result can also remain fully invested. The same is true when it comes to investing in the infrastructure sector, too. 

“The investment company industry has a thriving Sector Specialist: Infrastructure sector, with foundations both in the UK and internationally. It has been the growth story of the decade in the closed-ended universe, providing investors with the purest way of accessing infrastructure projects, by investing in contracts to develop and run long-term capital expenditure ventures in public sectors such as transport, healthcare and schools. 

“These contracts are for the long-term – 20-50 years – and aim to deliver a stable income over the period of the contract, often linked to inflation.” 

As new fund launches are expected in 2017, with Miton already confirming a global infrastructure income vehicle for the first quarter, infrastructure commitments by governments such as the US could be a deciding factor that drives investors towards the asset class. 

Richard Elmslie, co-chief executive and co-chief investment officer at Rare Infrastructure, says: “[Donald] Trump has a high opinion of what he wants to do, and he wants to make sure he maintains that image in the market. This therefore needs to be successful, and hopefully he sets up a really good framework that enables these projects to succeed. This is a multi-year shift as they are not going to be completed overnight.”

As a result of this volatile environment, it is not surprising that infrastructure is garnering attention from both institutional and retail investors. 

Serkan Bahceci, head of infrastructure research at JPMorgan Asset Management, notes that institutional investors’ average allocation to infrastructure now stands at more than 4 per cent of their portfolios and their average target allocation is approaching 6 per cent. 

Part of this is due to the unique characteristics of infrastructure, such as stable cashflows and resilience to economic fluctuations; diversification benefits; attractive long-term returns and inflation protection. 

But Mr Bahceci points out: “The main challenge for the retail investor is that private infrastructure is a highly illiquid asset class, hence requires long-term commitments. Investment vehicles such as target-date funds and various types of investment trusts are available and the spectrum they are offering in the infrastructure space is gradually widening. 

Investment vehicles such as exchange-traded funds focusing on infrastructure exist in the listed equity space, but they are highly correlated with the equities market and do not provide the diversification benefit and the illiquidity premium typically associated with the infrastructure asset class.”

Giles Frost, director of International Public Partnerships and chief executive of Amber Infrastructure, points out most money managers now see infrastructure as an appealing means for portfolio diversification, with London-listed funds seen as a primary gateway to what was previously an asset class reserved for large institutions. 

In terms of outlook, he says: “We are optimistic about North America. Irrespective of whether the touted infrastructure spending boom materialises, the pipeline in P3 – the US version of public-private partnerships (PPP) – remains strong.” 

Nyree Stewart is features editor at Investment Adviser

Performance: Infrastructure and Property trusts