Infrastructure is all around us. It’s the roads we drive on, the doctor’s surgery we visit and the utilities we use. It’s very much a necessity in modern society - it is essential in guiding our everyday lives and, therefore, economic activity.
And infrastructure not only needs to be built, but consistently renewed. However, while emerging markets like India have been spending large amounts of money to help the country modernise and meet the challenges of a rising populations and urbanisation, figures from Bank of America Merrill Lynch showed that infrastructure among G6 members – US, Canada, UK, Germany, France and Japan – has been in a multi-decade decline.
But all that could be about to change, as governments around the world look to infrastructure to help bring the global economy out of recession.
In the UK, Chancellor Rishi Sunak’s ‘Plan for Jobs’ in July 2020 included infrastructure spend, newly created green jobs and a £2 billion green homes grant to make homes more energy efficient. It was the government’s “green recovery”, tackling two vital issues at once: job creation and a cleaner economy.
The European Union also released a ‘European Recovery Plan’: a €1.85 trillion post-pandemic stimulus strategy, at the heart of which is accelerating the shift towards a lower-carbon, more sustainable economy.
On top of this, according to the New Climate Economy report, cities will require investment of US$ 2-3trn per year, or between two-thirds to three quarters of all infrastructure spending globally, to create an environment where “urban dwellers can lead healthy and productive lives”*.
A relatively new asset class for retail investors, infrastructure has become very popular over the past decade.
According to a TIME Investments’ survey of professional advisers from January 2020, 42% of adviser’s clients are now investing in infrastructure such as renewable energy, utilities, transport and logistics and social infrastructure**.
So why is this? The main attraction is the prospect of a strong and stable income at a time when interest rates have been at or close to record lows, and unlikely to increase anytime soon.
An infrastructure project can often take a number of years to complete so, to safeguard against that, companies enter into long-term contracts (often with governments) and often receive a stable income. It is also an industry with high barriers to entry, making disrupters a less-likely occurrence.
Infrastructure also offers a hedge against inflation through regulated entities or concession agreements. Up to 70% of investment assets owned by listed infrastructure companies have an effective means of passing through the impact of inflation to customers, thus benefitting shareholders***.
It’s defensive characteristics also make it attractive. The asset class is lowly correlated to traditional investments – thus spreading the risk of a portfolio. This can be very attractive, particularly at a time when the economic outlook is uncertain.
As with all investments there are also risk, however. In the case of infrastructure, the first is that certain sub-sectors can have different levels of risk attached. For example, regardless of whether there is a recession or not, people will still need to pay for the likes of electricity. However, the likes of airports are more likely to suffer if people are not travelling abroad as much – a problem we have all seen exaggerated beyond our wildest dreams in 2020.
There is also a strong political influence in the asset class, which can slow down the process due to legislation, while changes in leadership can bring projects to an abrupt halt. While bringing diversification, infrastructure funds can also bring currency risk into play.
For those wanting to invest in the asset class, here are some options:
A new entry into the Chelsea Selection in October 2020, this fund taps into the growing need for new and updated infrastructure projects – such as roads and utility systems - from across the globe, including both developed and emerging markets. The preference for regulatory or government supported businesses, as well as a high proportion of inflation-linked payments, makes for a dependable income stream.
You can read more about this fund in the 50th edition of Chelsea’s Viewpoint magazine.
Previously called First State Global Listed Infrastructure, this fund seeks to deliver income and some capital growth by investing in listed infrastructure companies around the world. First Sentier Investors has been one of the pioneers in providing access to this asset class, which quickly captured the attention of income-focused investors in a low yield environment.
Another fund on the Chelsea Selection is VT Gravis UK Infrastructure Income. This fund invests mainly in investment trusts exposed to different types of UK infrastructure; from railways and roads to GP surgeries and solar power. It has an income target of 5% per annum, which is distributed quarterly, and offers exposure a less volatile and higher-yielding area of the UK economy.
*Source: The New Climate Economy – Unlocking the inclusive growth story of the 21st century: accelerating climate action in uncertain times.
**Source: TIME Investments.
***Source: First State Insights – Infrastructure as a hedge to inflation, May 2018
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.