What is driving investor interest in infrastructure?

There are now a number of investment vehicles available to UK retail investors – a sign, perhaps, the sector is becoming more mainstream.

It helps that infrastructure has become rather more high profile, thanks to promises by governments in developed markets to increase infrastructure spending as thoughts turn to fiscal spending as a way of boosting economic growth.

One of President Trump’s pledges during his campaign trail was to start building more infrastructure developments (and not just the Mexican wall) to help generate growth and jobs.

Structural, not cyclical

Peter Meany, portfolio manager for the First State Global Listed Infrastructure fund, believes investors have been attracted to the asset class for its defensive qualities. 

“The underlying assets provide essential services and the business models are simple to understand. Infrastructure also offers growth which is more structural than cyclical, and strong pricing power which can provide a hedge to inflation,” he notes.

“Investors’ use of global listed infrastructure has evolved over time. Initially it was used as a defensive, low volatility equity. This expanded to see it used as a source of income, as declining bond yields increased the relative appeal of its growing and relatively secure dividend streams.”

Like property, infrastructure benefits from being a tangible asset for investors to hold and, as Mr Meany observes, this makes it an easy investment to understand.

As investor interest in infrastructure as an asset class has grown in the UK, the range of listed investment vehicles providing exposure to infrastructure-related projects has also increased.William Argent

According to the Association of Investment Companies (AIC), HICL Infrastructure was the first infrastructure investment trust to launch in March 2006, raising £250m. 

The AIC infrastructure sector is now the fourth largest investment trust sector, showing just how keen investors have been to get exposure to these projects.

The uncertainty which has dominated markets and politics over the past few years may also be a factor behind investor interest.

Strong and stable

William Argent of Gravis Capital Management, fund adviser to the VT UK Infrastructure Income fund, says investors are drawn to the dependability of infrastructure, which is often able to generate inflation-protected income streams.

“The visibility of future cash flows provides a level of certainty and is a key reason for asset values having demonstrated considerable stability. 

“In addition, the discount rates used by investment companies to value their assets have proved conservative and so in many instances investors have experienced gradual accretion in capital values,” he explains. 

“These characteristics have prompted many investors to view the asset class as a viable alternative to investing in government or corporate debt, where returns are considerably less attractive.”

The CPI rate of inflation spiked at 2.9 per cent in May this year, falling to 2.6 per cent in June, rebounding to 2.9 per cent in August.

Some investors have forecast the UK inflation rate has already peaked in 2017, but others warn it may still resume its climb.

Either way, inflation has a nasty habit of eating into savings and investments, so any assets which can provide some form of protection are likely to be in high demand at the moment.

Having confirmed investor interest, a number of fund houses have launched open-ended funds offering exposure to the sector, while several investment trusts have joined HICL since 2006.

Mr Argent observes: “As investor interest in infrastructure as an asset class has grown in the UK, the range of listed investment vehicles providing exposure to infrastructure-related projects has also increased.”

This means investors can now access the returns linked to a broader range of social and economic infrastructure projects. 

Government goals

“Continued infrastructure investment is critical to the government’s ambition to address the UK’s productivity gap and this underpins over £500bn of planned future spend. This pipeline of opportunities is likely to support continued investor interest in the sector,” he claims.

Mr Haynes also sees the potential for increased government expenditure to provide ongoing opportunities to those interested in being invested in infrastructure assets.

“As central banks’ monetary policies have become less effective, there has been a shift towards talk of increasing fiscal policies to support the global economy. 

“Through an increase in government spending, the authorities attempt to improve unemployment rates, fight against deflation, stabilise business cycles and influence interest rates. One way of achieving this economic ‘holy grail’ is through investing in long-term infrastructure projects,” he asserts.

But this is not just confined to the UK, meaning investor interest in infrastructure may be boosted by overseas infrastructure projects.

Mr Haynes adds: “In Europe and Japan, the European Central Bank and the Bank of Japan have both mentioned that looser fiscal policy may be required to boost economic growth. 

“However, the election of Donald Trump generated the most interest, with one of his biggest undertakings to ‘make America great again’ being to spend big to regenerate the country’s dilapidated infrastructure (although like many of his pre-election promises we are still to see the evidence emerge).”

Alex Scott, deputy chief investment officer at Seven Investment Management, sums up: “There is clear appeal for investors in the cashflow profile of infrastructure assets: long-term, highly predictable cashflows, with a significant degree of inflation-linking and generally backed by public sector counterparties.”

eleanor.duncan@ft.com