How infrastructure fits within a portfolio

This could be through investing in housebuilders or rail operators, energy companies or healthcare. 

Mike Pinggera, manager of the Sanlam Four multi-strategy fund, says infrastructure – or ‘real assets’ – is the way in which government and industries must address various challenges, such as rising life expectancy and population density.

He says: “There are many businesses around the globe investing in real assets to fulfil the needs and requirements of bigger populations”, and calls them the “pillars of a functioning economy”.

By committing to infrastructure spend, the aim is to improve the overall economic and societal environment.

For example, the UK government in the 2016 Autumn Statement, announced the creation of the National Productivity Investment Fund.

This aims to provide more than £23bn of “high value investment” between 2017 and 2022.

The Budget 2017 documents cited the fund will: “Focus on priority areas critical for improving productivity: economic infrastructure, housing and research and development.

“This built on existing plans for major investment over this parliament, including resurfacing 80 per cent of the strategic road network and the largest investment in the railways since Victorian times.”

It also includes setting aside £740m in digital infrastructure to improve the UK’s mobile and broadband services. 

Because of such commitments, James Smith, portfolio manager for Premier Asset Management, says infrastructure can be less cyclical, owing to the longer-term nature of projects.

He explains: “Clearly, individual stocks perform differently within any sector, but generally, the infrastructure sector is less cyclical and therefore less volatile than global equities.

“We see the essence of managing an infrastructure portfolio as aiming to achieve long-term equity-like returns, but with less risk.”

Different performance profiles

Figures such as this indicate the amount of money being put to work in various infrastructure products, but, as Nick Langley, co-chief executive and co-chief investment officer at RARE Infrastructure, a Legg Mason affiliate, points out, it is imperative to understand where in the infrastructure universe a retail investor should be, as different assets have different risk and return profiles.

Listed infrastructure companies typically display lower volatility compared to listed equities. William Argent

Mr Langley says there are four main asset types to consider when it comes to infrastructure. He outlines them as: 

Community and social assets – traditionally funded with public sector involvement, and which have a “clearly visible beneficial impact on society”, although these may have a lower return and limited growth potential.

Regulated assets – for example, energy companies and water utilities, which operate in regulated markets. This means their return profiles are affected by the regulator of their particular industry.

User pay assets – these tend to be unregulated, and are involved with moving people around an economy. For example, it could be investing in companies that operate road and rail networks, airports and ports. 

He adds: “These are more exposed to growth than regulated assets, as their revenues are typically linked to economic or population growth.”

Competitive market assets – these operate in markets with exposure to wholesale prices, and typically without the security of regulation or concession contracts. For example, it could be the companies that create and sell energy to the end user, rather than a manager of an energy network. 

According to Mr Langley: “We focus on investing in the regulated assets and user pay assets, because the companies either operate within a defined regulatory framework, or with long-term contracts in place that underpin the return profiles of these companies.”

Therefore, assets within the fund would include regulated gas, water and electricity companies in the regulated assets space, and toll roads, rail, port and airport companies in the user pay space.

What’s different about them?

Infrastructure investment is different from mainstream equity investment in that it will have a very close correlation with gross domestic product growth, and tends to be more exposed to economic indicators such as population growth.

It is also different to fixed income in that it potentially offers a higher yield without being subject to the same kind of pressures that affect fixed income.

Collins Roth, managing director at MPC Industrial Projects, describes the difference thus: “A pure infrastructure investment should be closely correlated to GDP, with a high degree of exposure to government (local or national) credit quality, GDP growth, and population growth.

“It is these factors which attract investors into the sector, often ‘pulling’ them from lower-return government debt products and sometimes real estate, which has some of the same underlying attributes, but a greater degree of asset selection and market list.”

Mr Roth adds there could be market risk with some infrastructure projects, such as toll roads, which could have greater market risk depending on availability payments, over free-to-travel roads and other transportation options, such as public transport.

How they compare with other asset classes

For Mr Langley, infrastructure stocks can have more attractive risk and reward profiles to other equity asset classes. 

He explains: “Being listed, infrastructure stocks can trade with market sentiment in the short-term, although over the longer-term, the companies should trade in line with their fundamentals.

“Infrastructure companies have delivered a reasonable share of rising markets. However, in times of economic stress the essential nature of infrastructure becomes attractive, and infrastructure has traditionally held up better in downturns than traditional equity indices.”

As a result, he believes this can help add stability to an overall portfolio.

There is also a difference between listed and unlisted infrastructure investments in terms of valuations and pricing, according to Mar Beltran, senior director and infrastructure sector lead for Europe, Middle East and Africa in the infrastructure ratings division of S&P Global Ratings.

Ms Beltran outlines: “S&P is noticing that currently the entry price point for listed infrastructure looks more attractive than unlisted.

“Growing competition for unlisted infrastructure assets has been putting increasing pressure on valuations, and listed assets are looking comparatively cheaper.”

William Argent, fund manager for Gravis Capital Management and adviser to the VT UK Infrastructure Income Fund, believes such stocks are less volatile, with more visibility around pricing and cash flows for listed infrastructure than other listed equities.

He states: “Listed infrastructure companies typically display lower volatility compared to listed equities.

“Visibility around future cash flows alongside regular net asset value (NAV) updates provide points of reference for investors and this tends to drive greater consistency in the valuation the market ascribes to infrastructure vehicles.”

By contrast, according to Mr Argent, equities are more susceptible to short-term changes in sentiment, and therefore valuations can fluctuate “routinely”.

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