Over the past few years there has been growing interest from investors in infrastructure as the sector has proven to be a reliable source of returns.
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.
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.
