Whether it is roads, airports, hospitals or schools, infrastructure is an essential element of modern society and plays a major role in the global economy.
It’s a structural trend which goes beyond any political rhetoric. Infrastructure will always need to be built and renewed. That is what makes it an attractive long-term investment.
As a low beta, defensive asset class, the attractions of infrastructure investing are not new to investors. It also has a link to inflation in that it has a number of regulatory, concession and contractual agreements that offer a degree of protection should it rise. Think of the likes of utilities, mobile towers, and oil pipelines as examples.
Performance in 2022 and outlook
According to figures from First Sentier Investors, 70% of investment assets owned by listed infrastructure companies have an effective means to pass through the impact of inflation to customers, to the benefit of shareholders. Utilities, developed roads, oil pipelines, airports, mobile towers, and bulk rail are examples of sectors with such protection in place.
Performance this year has highlight the asset classes’ resilience in uncertain times. Year-to-date the FTSE Global Core Infrastructure sector has outperformed global equities, returning 7.5%, compared to a loss of 4.6% for the MSCI World (the FTSE 100 has returned 3%). However, it should be noted that the asset class has not been immune, and investors will still have to deal with the impact of structural shifts in the economic environment.
The case for the long term also holds up. Figures from M&G say earnings before interest, tax, depreciation, and amortisation (Ebitda), for the Global Listed Infrastructure Organisation (GLIO) Index versus global equities shows that infrastructure earnings have held up better in the two decades before the Covid-19 pandemic than those of global companies in general.
I look at the sector as almost a two-speed investment case. One side is that with infrastructure there is a constant need to build and renovate – and the developed world has fallen woefully short on the care, maintenance, and growth of existing infrastructure. This has partially led to the rise of private companies – as more assets are sold into the sector by governments which do not have budgets to fund projects – the result being a preference for private companies to carry the risk.
The other is the changing nature/growth of the sector – with revolutions in energy, mobility, and digitisation. McKinsey says these changes are introducing new dynamics to existing infrastructure investments that previously appeared unlikely. The move to net zero is a prime example of new opportunities for investors. Upgrades are needed for power generation, transportation, global trade, and industrial production to meet these challenges (cleaner power and electric vehicles). We’ve already seen almost 500 global financial firms agree to align $130trn (£108trn) of investment to support net zero.
Looking ahead performance is likely to be very dependent on government bond yields. Higher government bond yields mean cash flows need to be discounted at a higher rate. It also means higher borrowing costs – infrastructure is usually very heavily geared because of the dependability of its cash flows. Infrastructure does benefit from good inflation protection (the cause of the higher government bond yields), so it does have its benefits too.
In summary, I’d expect the asset class to continue to produce solid returns if inflation peaks and real rates fall again, although they are unlikely to offer the same upside as growth driven equities. While other asset classes are also offering more attractive income levels than we’ve been accustomed to in recent years – the sector also offers an alternative income stream, which history tells us is always a sensible addition to any portfolio.
Here are a few potential routes into the asset class
I’d start with a couple of traditional global listed infrastructure funds. Ones worth considering include the First Sentier Global Listed Infrastructure fund, a 40-strong portfolio which targets economically sensitive assets with barriers to entry and pricing power, or the M&G Global Listed Infrastructure fund, managed by Alex Araujo, which looks for a balance of growth and a 3-4% income from three key areas of the sector: economic, social and ‘evolving’ infrastructure.
Another way to access infrastructure as an asset class is through investment trusts, as there are often benefits of using the closed-ended structure to gain access. Here I’d look at VT Gravis UK Infrastructure Income, which 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. Those wanting exposure through a multi-asset vehicle may like the VT Momentum Diversified Income fund or the TB Wise Multi-Asset Growth fund, both of which invest in infrastructure focused investment trust companies in the past.
I also want to touch on digital infrastructure – a rapidly growing sub-set of the asset class. These are companies that own physical infrastructure to support the digital world. Research from Knight Frank found that, by 2025, we will see 5,000 digital transactions per user, per day. Networks and connectivity are only going to expand in a post-Covid world and data storage through logistics, towers and data centres will grow with it. A good fund to consider here would be Schroder Digital Infrastructure.