InfrastructureAug 24 2017

The rise of infrastructure

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The rise of infrastructure

In the UK, Crossrail is the biggest construction project underway in Europe and is expected to cost £14.8bn to deliver.

Across the Atlantic, one of the main pledges of President Trump’s campaign was additional money to be allocated to infrastructure projects.

Nick Edwardson, multi-asset investment product specialist at Kames Capital, observes: “Significant promises have been made by politicians in many of the notable political campaigns of the last 12 months, for example to ‘make America great again’ by spending $1trn, or to boost UK national output by raising infrastructure spend by 50 per cent (from 0.8 per cent to as much as 1.2 per cent of GDP).

"These have raised investor expectations. That these promises have largely been delayed, pushed back and/or overcome by events has not gone unnoticed either.

"And it’s not all a one-way bet – [French president] Macron’s government is considering reducing France’s proposed €34bn infrastructure plan in order to meet budget deficit targets through spending cuts rather than tax rises.”

We believe investors are recognising the portfolio benefits of an infrastructure allocation at a time when calls for infrastructure spending are growing louder around the world.Ben Morton

At the same time, the asset class has entered the mainstream, although it is still considered an alternative investment and will not be suitable for all advisers’ clients.

Enter the mainstream

Ben Morton, portfolio manager of infrastructure portfolios at Cohen & Steers points out Morningstar recently created a standalone global listed infrastructure category in response to the growing acceptance of infrastructure as an asset class, while several indexes have been developed to benchmark the asset class.

“Global listed infrastructure has passed several milestones as an asset class. We believe investors are recognising the portfolio benefits of an infrastructure allocation at a time when calls for infrastructure spending are growing louder around the world,” he notes.

There are several reasons why infrastructure is an appealing investment, not just to do with the recent coverage it has had in political campaigns.

Infrastructure can also be an extremely useful diversifier in a portfolio and can provide a fairly reliable income stream.

Infrastructure’s inflation linkage is proving particularly appealing to UK investors as the consumer price index (CPI) hit 2.9 per cent in May, dropping back down to 2.6 per cent in June and remaining at the same level in July, but still above the central bank’s 2 per cent target.

In an inflationary environment, an investment which is potentially inflation beating is going to be popular among investors.

The asset class also has other attributes, as Alex Scott, deputy chief investment officer at Seven Investment Management explains: “Infrastructure can mean different things to different people, but most definitions have a common thread at their core.

"This is exposure to a predictable and relatively secure stream of cashflows over the long-term, generally backed by public sector counterparties or regulated market positions, and often with a high degree of inflation linking. 

“That sort of cashflow profile can be very appealing to investors.”

Building blocks

There are several ways in which investors can get exposure to infrastructure. A conversation with a financial adviser should be able to determine which type of exposure is best for their portfolio, as well as their overall financial planning needs.

Paddy Dear, co-founder of closed-ended investment company Tetragon, says: “Investors can get exposure through several means: pure play infrastructure funds, either publicly quoted funds or private funds, or through funds that have a diversified exposure that includes infrastructure assets.”

Infrastructure has been an impressive growth story this decade in the investment company sector, providing investors with the purest way of accessing infrastructure projects.Annabel Brodie-Smith

He also suggests rather than trying to predict which areas within the UK or which regions beyond the UK will be infrastructure hotspots, it is more appropriate to have “a broad approach to infrastructure that is always evolving and covers the gamut of the asset class, from health and education to student housing, renewables, highways and street lighting”.

Darren Cooke, chartered financial planner at Red Circle Financial Planning, has a similar view. 

He reveals he holds the First State Global Infrastructure fund in his portfolios, preferring to “stick to that rather than make any specific call”.

Investment trusts are an increasingly popular way to invest in infrastructure, with the Association of Investment Companies (AIC) reporting the Sector Specialist: Infrastructure sector raised £1.7bn in secondary issues in the first six months of 2017 to the end of June.

Annabel Brodie-Smith, communications director at the AIC, points out with an average yield of 4.8 per cent, it is not hard to see why investors are attracted.

“Infrastructure has been an impressive growth story this decade in the investment company sector, providing investors with the purest way of accessing infrastructure projects by investing in contracts to develop and run long-term capital expenditure projects in public sectors such as transport, healthcare and schools,” she explains.

“There are seven investment companies that make up the Sector Specialist: Infrastructure sector and at the end of May total assets are almost £9.5bn, making it the fourth largest investment company sector,” Ms Brodie-Smith adds.

Investing in infrastructure is not all about accessing the spending promised by governments or the high profile construction projects though.

More often than not, investors will be getting exposure to the less well reported but vitally important infrastructure developments such as street lighting, and the construction of schools and hospitals.

Mr Edwardson explains: “The infrastructure funds in which we invest typically own operational assets on long term, often government backed contracts. 

“As such these do not immediately benefit from the promise (or reality) of additional infrastructure spend which is steered towards materials and construction plays.”

Getting the right exposure

Mr Scott emphasises it is important to establish exactly what part of the infrastructure project a fund or investment trust is invested in, and the type of exposure the adviser’s client wants.

“Government spending on infrastructure projects may mean higher spending on capital goods, construction contractors and employment in relevant industries,” he points out.

“The building of infrastructure assets is not necessarily a theme we’d look to invest in directly to any significant degree, although some of our infrastructure funds may be involved in providing capital at the early construction phase of new infrastructure assets. 

“However, where we see opportunities to invest in owning infrastructure assets, generating a steady stream of cashflow, this can be a good fit for portfolios.”

For Mr Edwardson: “The certainty of contractually-backed income streams, a high initial yield and a low correlation with other asset classes means infrastructure funds with operational assets remain an attractive investment. 

“They will not suffer the vagaries of political expediency to which spending commitments are sometimes subject. As such they may be more dependable than expectations of new spend.”

eleanor.duncan@ft.com