How can investors access the asset class?

Supported by
Legg Mason
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Supported by
Legg Mason
How can investors access the asset class?

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.

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.Adam Burniston

“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.”

He suggests: “We believe the investment teams at these trusts have both the expertise and economies of scale to take sole - or significant - ownership in an infrastructure project at a sensible valuation, and where appropriate can also manage the project proprietarily.”

“The significant differences in the types of assets that you can gain exposure to through investing in the listed and unlisted markets leads to different sector and regional risk exposures offered by the two markets.Nick Langley

Turning to listed infrastructure projects held in open-ended funds, Mr Burniston adds: “While the underlying assets may be real infrastructure and therefore inherently have the defensive characteristics we look for and would perform resiliently in the long run, the fact of the shares being listed on the main stockmarket means these companies act very similarly to equities.”

If the thought of equity-like risk does not appeal, then infrastructure funds may not be the right type of exposure.

Seven Investment Management (7IM) has chosen to get its exposure to diversified infrastructure portfolios through investment trusts.

Simon Moore, senior investment manager at 7IM, explains the appeal in availability-based infrastructure projects is the guaranteed government-backed payments and a high level of inflation linkage.

While the rate of inflation in the UK is climbing, staying above the Bank of England’s 2 per cent target, beating inflation may well be a high priority for advisers’ clients.

Mr Moore says: “These give us exposure to government cashflow, currently offering significantly higher yields than from UK gilts for example, with little correlation to equity markets.”

London-listed infrastructure investment trusts include:

  • 3i Infrastructure
  • BBGI
  • GCP Infrastructure
  • HICL Infrastructure
  • International Public Partnerships
  • John Laing Infrastructure
  • Sequoia Economic Infrastructure Income

He also notes: “It is relatively straightforward to put together a portfolio of global listed companies that are loosely related to infrastructure in the widest sense. There are several daily dealing open-ended funds with ‘infrastructure’ in the title.”

Allocating to both

But as Mr Langley observes, listed and unlisted infrastructure assets are simply alternative ways for investors to gain exposure to the same asset class, with the same attractive characteristics.

He explains: “It is important to recognise that ultimately investment decisions in both listed and unlisted markets are based on the same criteria: in both cases, the aim is to identify investments which meet the investor’s long-term requirements and which generate a return that is sufficiently high to offset the risk. 

“In both cases, the most important determinants of value rely on long-term assumptions with the same uncertainties. Undertaking detailed [due] diligence and considering longer term risks and opportunities is therefore crucial regardless of ownership structure.”

He urges advisers and their clients to think of unlisted and listed assets as “complements rather than substitutes”.

“The significant differences in the types of assets that you can gain exposure to through investing in the listed and unlisted markets leads to different sector and regional risk exposures offered by the two markets,” he points out.

“We think this can be underappreciated by investors, and that by allocating to both unlisted and listed infrastructure investors can optimise their risk and return exposures, and improve portfolio construction efficiency.”

As Mr Haynes points out, investors are able to get passive exposure via the iShares Global Infrastructure ETF, with a portfolio focused on utilities, transportation and energy.

For investors, the good news is they have a choice when it comes to getting exposure to this asset class.

eleanor.duncan@ft.com