Infrastructure investment is set to become a big theme for investors over the coming months as the Treasury signals an emphasis on fiscal policy.
Chancellor Philip Hammond talked about the need for infrastructure spending at the Conservative party conference last week, and this approach has been backed by the Bank of England.
Bank governor Mark Carney has previously said the central bank is “overburdened” and better balance needs to be found between monetary, fiscal and structural policy.
The Association of Investment Companies says there are eight specialist infrastructure investment trusts In the UK offering an average 4.4 per cent yield, with most consistently growing the level of dividends they have paid out since 2007.
The annual income growth seen in 2014 and 2015 was 3.5 per cent, and the average since 2007 to 2015 was 20 per cent.
Sanlam Four Multi Strategy fund manager Mike Pinggera says: “When you’ve got a long-term government bond today offering you a return of 70 to 80 basis points, then the attractions of an infrastructure investment yielding 4.5 per cent, but with a link to inflation, becomes quite compelling.”
Pinggera has doubled his exposure to infrastructure to 20 per cent in the last 18 months, having launched with 10 per cent allocation in 2013, and he is considering adding more.
Tilney Bestinvest managing director Jason Hollands says details of fiscal stimulus will come through in the Autumn Statement in November. He suggests measures might include targeted infrastructure projects, as well as reform of the planning laws, financing for commercial technology innovations, and tax cuts – possibly including a reduction in VAT to stimulate consumer spending.
Investors can tap into infrastructure through listed investment companies or infrastructure focused equities.
Hollands says: “Investment in infrastructure – such as transport networks, utilities, schools, hospitals and prisons – has clear attractions during times of economic uncertainty.
“These projects are typically underpinned by very long-term legally-binding contracts which are often with state-entities, they provide very predictable revenues which often include annual inflation-adjustments and they are not highly sensitive to the economic cycle.”
AJ Bell investment director Russ Mould says infrastructure funds, already popular with institutional investors, are coming onto advisers’ radars as a reliable source of income.
The IF RARE Global Infrastructure Income fund, launched by Legg Mason in July, has already hit £200m. Legg Mason head of UK sales Adam Gent says it favours companies with a stable cash flow, holding 30 and 60 listed infrastructure companies, including those in the energy, utilities, transport, and communications sectors. US and Canada make 30 per cent of the portfolio, and the team will remain “flexible” in their allocation and “make a judgement on opportunities” after the US election.
When it comes to the UK Government’s infrastructure plans, the Chancellor has warned they are part of a “very long-term agenda”.
As a result, Pinggera says fiscal stimulus announcements in the Autumn Statement are unlikely to have any immediate impact on his portfolio positioning.
He says: “I’m really interested in completed projects rather than construction projects. There’s a great pipeline of future investments, but it doesn’t change my near-term opportunity set.”
Schools, roads, hospitals are some of his picks within the space, and he has recently expanded into the private rented sector and renewables.
Pinggera adds when the sector launched 10 years ago investment companies were so small managers could only include them as a relatively small part of their portfolio. But today, the AIC says the sector is its fifth largest and has grown to £8bn, compared to £246m at launch.
Architas investment manager Solomon Nevins, who manages the Diversified Real Assets fund, says social infrastructure projects have raised “a huge amount of capital”. Nevins is invested in military housing and motor stations through the Public Partnership and John Laing Infrastructure trusts with a 2.5 per cent exposure for both funds.
He says: “Austerity has gone out of fashion, however, the major impediment to infrastructure spending is creating a framework for political parties to allow multi-decade projects.”
When it comes to investment trusts, Mould recommends the 3i Infrastructure fund, which has a focus on the US, Asia and Europe. For UK exposure he recommends the John Laing Infrastructure fund, with 89 per cent exposed to the UK, and the HICL Infrastructure fund, which has 90 per cent allocated to the UK, with projects also in Australia and Canada.
But when it comes to investment trusts, Mould warns: “The only snag here is these trusts trade at an average premium to net asset value of 15.9 per cent, so would-be buyers are implicitly paying away the first few years’ dividends, or at least assuming the underlying project holdings will continue to rise in value.”
The Lazard Global Listed Infrastructure Equity fund is an alternative way of accessing the sector, which is an equity fund with an infrastructure theme. It owns US rail firm Norfolk Southern, Italian company Altantia, which manages toll roads around the globe, and Australian group DUET which owns energy utility assets.
Hollands points out the fiscal stimulus theme is not limited to the UK with the Japanese government launching a $45bn package in August and both US presidential candidates pledging to spend billions on infrastructure.
Phil Harris, who runs the UK Equity Growth fund at EdenTree Investment Management, says his key exposure to infrastructure is through housebuilder Bellway, his second largest holding at almost 2.5 per cent.
Harris says if the fiscal shift occurs, investors should be exposed to housebuilders with good volume growth, but he is less keen on the construction sector.
He says: “You have big complex projects and margins are very low. The risk-reward ratio is not fantastic. Construction companies have a big history of contracts that go wrong and wipe out several years of profit.”