The analyst’s view
James Carthew, head of investment companies, QuotedData
In a reversal of the pattern of the past couple of years, a trend towards lower interest rates should help rebuild confidence in the infrastructure sector. It came as a great surprise to many investors when listed infrastructure trusts started to trade on discounts to NAV rather than the premium ratings they had been used to.
It may have also caught some managers on the hop, as they had been accustomed to running up debts by buying assets with (then cheap) floating-rate debt and paying that back with the proceeds of new share issuance.
Unfortunately, the rise in rates coincided with a buyers’ strike by wealth managers and others on the back of misleading cost disclosure rules. That has created some real bargains.
One of the cheapest is Pantheon Infrastructure. The trust’s portfolio has a fairly strong bias to digital infrastructure. As such, it is a beneficiary of a boom in data centre construction, but it is also helping to fund the rollout of high-speed fibre and supporting the growth in mobile data. The portfolio also has exposure to renewables and energy efficiency projects, district heating and cooling, and a stake in the UK’s national gas grid.
Pantheon Infrastructure can be bought on a 29% discount to NAV, which is unjustified by its track record.
During a 12-month period it has delivered the highest total return on net assets (over 13.2%) of any London-listed infrastructure trust, ahead even of the mighty 3i Infrastructure (up 11.6%).
Those NAV returns reflect the nature of its investment approach, which – like 3i Infrastructure – is designed to deliver both income and capital gains, but at the cost of a lower dividend yield. This trust is overdue a re-rating.
The wealth manager’s view
Tom Hopkins, senior portfolio manager, BRI Wealth Management
Global listed infrastructure funds have tested the patience of most investors over the past three years in an environment clouded by interest rate uncertainties and concentrated returns within the artificial intelligence (AI)-hyped ‘magnificent seven’. However, the market seems to be on the cusp of a broadening out of equity returns and this could provide an interesting catalyst for global listed infrastructure funds.
As global uncertainty intensifies due to ongoing conflicts, ever-changing political polls and fragile growth equity valuations, one relatively stable factor to focus on is the start of rate-cutting cycles in most developed economies, which should create favourable conditions for infrastructure-type investments.
The macro outlook in late-2024 into 2025 is more supportive of listed infrastructure due to slower global growth, above-trend inflation and interest rate reductions. I would not be surprised to see more M&A activity in the sector now rate stability has returned.
Infrastructure equites tend to be lower-beta than most global equites due to the more defensive sector exposures – utilities, real estate assets, toll roads etc. These businesses are typically more predictable, and investors are getting paid to be patient via some generous and growing dividends.
In July and August, there were some stark reminders for investors of just how quickly volatility can pick up in ‘hyped’ areas of the market. With investors obsessing over the capabilities of AI technologies, it can often be forgotten that critical infrastructure is needed behind the scenes.
The need to provide large technology companies with state-of-the-art data centre facilities, which are adequately powered by renewable and sustainable power sources, requires major infrastructure investment.
On top of other powerful themes over the coming decade including renewable energy, clean transportation and sustainable water and waste management, all of the above topics feature within the global infrastructure sector.
Important structurally growing themes with generous dividends should compensate patience, while also providing defensive diversification benefits for portfolios.
The fund selector’s view
Juliet Schooling Latter, research director, FundCalibre
Infrastructure assets have long been favoured for their stable, inflation-adjusted returns. However, as interest rates rose, investors shifted their focus to higher-yielding cash and fixed-income options, dampening valuations across the sector.
If interest rates decline as markets are currently anticipating, we believe this asset class is poised to regain its appeal. Even if rates do not return to previous lows, the sector’s alignment with long-term structural growth trends, including urbanisation, technological advancements and climate change mitigation, underscore the enduring value of infrastructure investments. As a result, we expect strong returns from this sector going forward.
Governments worldwide are not just paying lip service; they are investing heavily in infrastructure development to stimulate economies and support energy transitions, creating new opportunities for investment in a variety of exciting asset classes. For example, in the US, the bipartisan infrastructure deal has allocated $90bn (£68.01bn) to upgrade the country’s transport system, $25bn for airports and $17bn for port infrastructure and waterways.
Private infrastructure investors are well-positioned to bridge the gap between government infrastructure targets and the challenging fiscal and monetary environment facing public sector finances. As populations grow, supply chains evolve and energy consumption increases, we can confidently anticipate that global infrastructure can continue its current growth trajectory – while delivering reliable dividends for years to come.
Among the funds we favour are the First Sentier Global Listed Infrastructure and M&G Global Listed Infrastructure funds, which invest in ‘hard’ infrastructure globally through listed companies that own these assets. Additionally, VT Gravis Clean Energy Income is capitalising on the widespread adoption of renewable energy by investing in a diversified portfolio of the best listed vehicles across developed markets, providing defensive stability and steady income.
Furthermore, just as power, water, and road infrastructure are essential to our society, digital infrastructure is becoming increasingly vital. With digital technologies now embedded in our everyday lives and the rapid advancement of AI, which demands substantial computing power and network connectivity, there are strong reasons for investors to consider thematic funds like Schroder Digital Infrastructure.
The fund manager’s view
James Davies, investment director and multi-asset fund manager, Close Brothers Asset Management
Infrastructure is an asset class often viewed as a ‘bond proxy’, in that it should deliver stable returns from predictable cashflows. It is for this reason that we use the bulk of our infrastructure exposure as a diversifier of our bond allocation, as opposed to our equity weighting.
In a perfect world, therefore, central banks commencing rate cuts should be positive for infrastructure and by extension the holdings within our funds. Like most things in the investment world, however, it isn’t quite as simple as that.
There are now so many different drivers that impact ‘infrastructure’ that it can be unhelpful to view it as one homogenous asset class. For example, the outlook for different renewables, with different power prices and regulatory regimes, will not be the same as for a portfolio of Canadian police stations.
All this being said, we are positive on the sector’s outlook for a number of reasons. First, as mentioned, many of the fundamental reasons for holding infrastructure are more aligned to its diversification qualities in respect to bonds, so falling rates should present a tailwind as investors who’ve been happy earning a return on cash and cash proxies look to reallocate to longer-dated forms of reliable income.
Second, the fact that in the UK many of the infrastructure investment trusts are still trading at a significant discount to their NAV presents an opportunity for share price appreciation.
Finally, and more broadly, I would argue that the need for additional spending on areas such as renewable energy and social infrastructure across the world presents opportunities for established infrastructure vehicles and teams to access what will be major growth sectors over the next decade.
This article originally appeared in the September issue of Portfolio Adviser magazine
