There has been under-investment in infrastructure for decades in the UK, US and Europe and the additional £375bn investment in the UK is a welcome boost. Growth in Asia and emerging markets continues to fuel infrastructure spending with the Organisation for Economic Co-operation and Development estimates over $50trn will need to be spent by 2030 to meet the world's requirements for roads, railways, electricity, water and telecommunications infrastructure.
Equity and bond comparison
As a result, fund managers are seeing a strong pipeline of potential investment opportunities.
In the past five years, while they share characteristics of bonds and shares, infrastructure investments have delivered better returns than the former but lagged the latter.
Historically, they offer a reliable growing income over the longer term, while the companies involved in these projects have the potential to grow their profits and as such the capital value of their businesses.
The chart below shows the performance of listed infrastructure and utility companies, since November 2008, has been between shares and bonds.
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Source: Hargreaves Lansdown; Lipper Hindsight
Three ways to invest in infrastructure:
• Buying shares in companies that own or operate infrastructure e.g. National Grid
This limits diversification and concentrates risk into a few specific areas, but allows investors to back companies with infrastructure assets that they wish to have exposure to at a price they are willing to pay.
• Investment trusts e.g. HICL Infrastructure Company Ltd
These invest directly in infrastructure projects such as schools, roads and hospitals
• Invest in a fund e.g. First State Global Listed Infrastructure
Unit trust/Oeic funds invest in shares which own or operate infrastructure
There are pros and cons of investing in a fund or investment trust. Advantages include getting access to an experienced management team; an investment which offers a good income; diversification to an alternative asset class.
However, disadvantages include a high yield and historically reliable growing income has driven demand causing valuations to rise to an average premium of 8.4% above their net asset value; volatility of the asset class increases because an investment trust can move from a premium to a discount; infrastructure investment trusts are relatively new and their performance is untested over the longer term.
A unit trust/Oeic which invests in shares provides investors access to a more diversified portfolio of investments as well as manager expertise whilst avoiding the premium to net asset value. They are likely to provide the greatest diversification to this area of the market.
As infrastructure investment trusts are now trading at a significant premium to their net asset values we prefer a global infrastructure fund such as First State Global Listed Infrastructure.
