In the run-up to the US elections presidential hopeful Hilary Clinton has pledged $500bn in infrastructure spending over the next five years. Her Republican opponent Donald Trump has ambitiously promised to double her offer, while also slamming the “false economy” created with low interest rates. Political rhetoric, matched by investors’ continued search for alternative sources of yield, has shone the spotlight on infrastructure.
AJ Bell investment director Russ Mould says infrastructure funds, already popular with institutional investors, are coming onto advisers’ and retail clients’ radars as a reliable source of income in the face of low interest rates and negative bond yields. The IF RARE Global Infrastructure Income fund, launched by Legg Mason in July, has already hit £200m.
Regarding room for more infrastructure spend in the US, Mould says: “According to President Obama’s US Council of Economic Advisers the US will spend just over 3 per cent of GDP on infrastructure, a six-decade low.” This year the American Society of Civil Engineers argued that US GDP would be reduced by $4trn between 2015 and 2016, owing to poor roads, airports and bridges, due to lost sales, rising costs and slower potential employment growth.
“In this respect, targeting fiscal stimulus rather than monetary stimulus seems much more sensible. The cash can be targeted – whereas QE has tended to benefit financial assets rather than the real economy, and thus also a narrow section of society,” Mould says.
Clinton has suggested the creation of a national infrastructure bank, which would be given $25bn to support loans and loan guarantees. On the other hand, Trump said he would finance infrastructure projects through a fund supported by government bonds.
Mould says: “Investing in infrastructure is best suited to patient, long-term investors – and it has been popular with pension funds for a long time already, because well-run infrastructure projects generate consistent cashflow, which asset managers can run to match future liabilities, even allowing for the risk of regulatory intervention.”
Fidelity global economist Anna Stupnytska says infrastructure spending could provide a “meaningful boost” to growth and prompt the Fed to hike interest rates higher if the next US president delivers what has been promised.
She says: “In the US, the potential for narrowing the output gap and pushing inflation is higher than before as fiscal stimulus boosts inflation. We already have growing inflation in the US, with the core data at 1.7 per cent.
“Infrastructure spending makes sense in the US as the infrastructure is poor. It would be a good growth story for equity especially for those sectors that will be involved in infrastructure rebuild like industrial and material.”
Fund managers are divided on the best way to access infrastructure, with some preferring specific stocks as opposed to open-ended funds or investment trusts. Miton’s Anthony Rayner, manager of the multi-asset fund range, says he buys companies that build or maintain infrastructure projects. With regards to November’s presidential outcome, however, he’d rather see more clarity on policies before starting to build a basket of US stocks.
Rathbones head of multi-asset David Coombs says he won’t access infrastructure through open-ended funds as they are too illiquid, vulnerable to the same problems commercial property funds suffered in the aftermath of the Brexit vote, but would invest directly in companies too.
Meanwhile, Ben Morton,portfolio manager for Cohen & Steers’ infrastructure portfolios, says active management is critical in the infrastructure space as many infrastructure businesses’ performance differs “dramatically” based on relative sensitivities to macro and micro drivers.
He says: “For example, transportation infrastructure tends to be more sensitive to changes in economic conditions, midstream energy infrastructure performance is indirectly linked to energy market dynamics, and utility infrastructure tends to have higher sensitivity to interest rates.
“At a micro level, many infrastructure assets are significantly impacted by regulatory or government-related dynamics, each of which can lead to performance variability.”
Architas investment manager Solomon Nevins, who manages the Diversified Real Assets fund, says the US housing and consumer sectors will largely benefit from infrastructure spending but that would require a long-term approach.
However, Nevins’ focus is in the UK where he supports social infrastructure projects as the sector has raised “a huge amount of capital”.
The political rhetoric here is mirroring that of the US, with Chancellor Philip Hammond signalling at the Conservative Party Conference that there would be increased infrastructure spending when he releases the government’s first budget following the UK’s vote to leave the European Union. Prime Minister Theresa May has also taken a swipe at the Bank of England’s policies.
Nevins 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.
“But one of the things to agree on infrastructure is the low cost of borrowing. In the US especially we are seeing a lot of borrowing through bonds with 40 per cent of all bond sales by agencies going to fund infrastructure projects.”
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 to both funds.
Legg Mason head of UK sales Adam Gent says of the IF RARE Global Infrastructure Income fund : “We like companies with a very stable cash flow such as water companies which give more security in terms of revenue stream. US and Canada make 30 per cent of the portfolio and we’ll keep it that way irrespective of the result of the elections.”
The fund holds between 30 and 60 stocks, investing in listed infrastructure companies, including those in the energy, utilities, transport, and communications sectors, in both developed countries and emerging markets around the world.
A report from Sarasin & Partners says due to the long-term and illiquid nature of infrastructure as an asset class investors often opt for an unlisted illiquid fund with pricing that reflects the underlying NAV. Investment trusts are another alternative, despite greater share price volatility.
Currently, there are eight specialist trusts offering an average 4.4 per cent yield, according to the Association of Investment Companies.
Most of these trusts have consistently grown the level of dividends they’ve paid out since 2007, according to Numis Securities data. 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.
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 Mould warns: “The only snag here is these trusts trade at an average premium to NAV 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.”
Gent also cautions: “There’s a perception from the market that we’ll move very happily and smoothly to fiscal policy. But it is not as simple as that. Fiscal policy has to go through political processes and fiscal checks; it is not as the same as for banks, it doesn’t have to be total transparent and loyal to their electorate.
“If we do get the delivery of some investment spend and if it is enough it will have quite big implications so rather than bonds and bond yield proxies doing well you might get cyclical players doing well as well as inflationary players and commodity stocks.”