Once an investor has decided they want exposure to infrastructure in their portfolio, the next question is which type of investment vehicle is the best way to access the asset class.
Should investors choose an infrastructure investment trust, or allocate via an open-ended infrastructure fund?
This is likely to depend on their preferred exposure to infrastructure projects.
“The two type of infrastructure assets available to investors are the unlisted assets – those which are not traded via public markets – and listed assets.
"Listed assets are the equity securities of infrastructure companies, projects, and developments such as airports, toll roads, and energy companies, that are listed on a stock exchange,” says Nick Langley, co-chief executive officer and co-chief investment officer at RARE Infrastructure, a Legg Mason affiliate.
“Investors can invest in vehicles that own such assets, with closed-ended investment trusts being a key vehicle through which UK investors access unlisted infrastructure assets, and open-ended listed funds… being a key vehicle through which UK investors access listed infrastructure assets.”
Two routes to access
Gavin Haynes, managing director at Whitechurch Securities, sets out the two defined approaches to investing in infrastructure.
“Firstly, 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,” he explains.
“Such trusts will typically be focused towards Public Finance Initiatives and Public Private Partnerships whereby public infrastructure projects are financed by private funding.”
He continues: “The other route is through the stockmarket, 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.”
Mr Haynes believes the more accessible route for investors is via open-ended funds, as they provide more liquidity and transparency than investing directly in infrastructure projects.
He also observes while investment trusts focus on generating a high income and providing some inflation protection, “such has been the demand for the asset class, these trusts are largely trading on significant premiums which is why we are not investing in these vehicles at present”.
Listed or unlisted?
But other investors prefer the exposure they get to unlisted infrastructure projects through investment trusts, including Adam Burniston, model portfolio manager at Thesis Asset Management.
“Direct infrastructure as an asset class tends to be characterised by large lot sizes and high illiquidity,” he notes.
“When we talk about infrastructure we tend to mean Private Public Partnerships or arrangements similar in nature, wherein a contracted, government-backed revenue stream allows for a predictable cashflow and valuation for investors.
"Think schools, sanitation infrastructure or railway rolling stock, to name but a few. We feel the best way of accessing this is by using investment trusts.”