Building an income from infrastructure

Posted by Fiona Liu in Portfolio management category on 05 May 17


Infrastructure

In our previous article, we discussed the benefits and risks of investing into infrastructure. Whilst this asset class is relatively new, it can act as a diversifier to income derived from bonds or equity. In this article we look at what’s happening in this sector and how you can invest in this area.

In the final piece of this series, we will see a Fund Manager’s approaches to infrastructure investing and his thoughts on this sector.

Opportunities within this sector

Generally, there is always a need for upgrading existing infrastructure within the developed world and building new infrastructure to accommodate the growing demand for services required in developing economies. In a report by McKinsey & Co (Bridging Global Infrastructure Gaps), they have estimated that the world invests $2.5 trillion a year in infrastructure but in reality we would need to spend $3.3 trillion a year to support the expected rates of growth.

The Chancellor Phillip Hammond focussed his first ever autumn statement on the need to invest in infrastructure. He announced the creation of a £23 billion National Productivity Investment Fund with an aim to improve transport links, broadband coverage and construction of new homes. He has also committed to a £500bn spend on infrastructure. This should, in theory, create new jobs and help increase economic growth as well as improve productivity e.g. if transport links were more reliable and efficient, workers will get to work on time.

Although Donald Trump hasn’t published a detailed spending plan for infrastructure, he has recently announced a proposal of raising $1 trillion through public and private sources, for such investments.

How can I invest in infrastructure?

As an alternative asset class, it accounts for only a small percentage of Funds that sit within the Investment Association and are mainly run by boutique Fund houses. Most Funds don’t invest directly into physical assets but invest in companies that are exposed to it e.g. The Canlife Global Infrastructure Fund primarily focuses on utilities and industrials companies. Having said this, some investment trusts do finance, build and manage physical buildings. As these invest in the physical buildings, it is important to note that these carry a higher risk as projects can potentially default or be delayed.

There are Funds that invest globally – e.g. First State Global Listed Infrastructure covers the US, some countries in Europe and Asia as well as UK; whilst some focus on a particular region e.g. VT Infrastructure Income concentrates on renewable energy within the UK. In addition, some Funds like the Architas Diversified Real Assets will invest in a variety of Funds that has exposure to different sectors within infrastructure.

As an asset class that is designed to produce returns with lower volatility, some multi asset Funds also invest in infrastructure Funds. Below, are some examples and the yield they produce:

Multi Asset Fund Infrastructure Fund Yield
Premier Multi Asset Monthly Income C Inc GCP Infrastructure Income 4.60%
Fidelity Multi Asset Income Y Inc HICL Infrastructure 3.63%
Newton Multi Asset Diversified Return Inst W Inc GCP Infrastructure Investments 2.77%
L&G Multi Manager Balanced Trust I Inc Lazard (Ireland) Global Listed Infrastructure Equity 1.50%
  Source: Providers’ factsheet – Yield as at March 2017 

Summary

Infrastructure has often been compared to bonds as it shares a similar feature – stable, predictable income over a long period of time. Both these asset classes aim to provide income whilst minimising volatility – a welcome strategy for investors. At times when we see low gilt yields, and the bond sector looks somewhat overheated, infrastructure investments can be considered as an alternative with reliable stable income.

Since the attention has turned to infrastructure, we have seen Fund providers launching new infrastructure Funds including Miton’s new Global Infrastructure Income Fund. Clearly, for some, it is seen to be an exciting opportunity for growth and income and it will be interesting to see how this sector will perform in the long term.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.

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