In the low rate environment, investors have been hard-pressed to find alternative sources of income to help meet their investment needs.
While some investors have sought out yield in more adventurous bonds and equities, others have turned increasingly to the infrastructure sector.
Existing funds in the sector have seen increased levels of interest, yet with the prospect of rising rates, questions have been asked over whether it will continue to offer compelling yields.
Jim Wright, manager of the Miton Global Infrastructure Income fund, to be launched at the end of the month, says the sector still offers a strong investment proposition.
The manager, who previously oversaw the global duration equity portfolio of the British Steel Pension Fund, says some infrastructures assets are likely to benefit from an inflationary environment forecast by many.
He said: “The attractiveness of infrastructure is stable, underlying income. There are a lot of long-term, long duration assets and lack of cyclicality.”
Although some assets are likely to be more linked to economic performance, such as some transport areas, others like utilities are likely to have no correlation to the broader market and economic conditions, he says.
Performance of FTSE Global Core Infrastructure 50/50 vs MSCI AC World over 3yrs
Source: FE Analytics
Wright says while companies in the sector have come to be labelled as ‘bond proxies’ in the low rate environment, there are several factors that could yet provide a boost for infrastructure stocks.
The manager says infrastructure stocks are likely to prove resilient particularly in current volatile and uncertain market conditions.
The link between inflation and infrastructure company revenues is also important for investors to consider.
“Higher inflation is a nuance [of those companies], a lot of revenues in the sector have direct inflationary linkage,” he said. “Having said that the cost base will increase.”
Wright says while rising bond yields may be “bad news” for more highly geared, asset-backed stocks in the sector, other parts of the market, such as regulated utilities, may be able to weather higher costs of debt.
Meanwhile, any further strengthening of the weak economic growth environment is likely to be positive for most areas of the infrastructure sector, says Wright, as demand for expanded services and greater efficiency spurs greater investment.
Indeed, the requirement for investment in existing infrastructure across the world would likely grow further with an uptick in global economic growth.
“There’s absolutely no reason why listed infrastructure stocks don’t grab their share of the growth opportunity,” the manager added.
Wright says there are a several key themes that the fund will take advantage of.
“Front and centre is North American oil & gas infrastructure,” he said. “If you think about the new administration and their desire to see onshoring and have the industry come back to the US.”
The manager says under the new president, new projects held up by the previous administration are likely to be greenlit as part of its efforts to support the industry, in a bid to become self-sufficient and create more jobs.
Elsewhere, the manager sees opportunities in US regulated utilities where returns are directly linked to rising inflation and where there are significant opportunities for growth and renewal.
Performance of MSCI USA Utilities IMI 25/50 Index over 5yrs
Source: FE Analytics
Wright says recent corporate activity at global electricity and gas network companies suggest there are institutional investors, such as pension and sovereign wealth funds willing to pay significant premiums for assets owned by listed companies.
One other area the manager is focused on – although describing it as a “slower burn” – is the mobile telecommunications sector where increasing consumption of data by consumers and the need for investment in new projects is likely to drive longer-term returns.
With an investable universe of more than 400 stocks, the manager removes stocks and sectors he doesn’t want to be invested in and also considers other factors such as demand, political/regulatory risk, commodity risk and the competitive environment.
Wright looks at balance sheet gearing, whether the dividend payout is sustainable and whether there is a compelling upside for growth.
The fund’s top holding upon launch will be Enbridge, a US/Canada oil & gas pipelines company, making up 6.0 per cent of the portfolio.
Among other companies the manager will hold are UK firms National Grid, SSE, Vodafone, Pennon and National Express.
The model portfolio currently holds 42.5 per cent in US, 16 per cent in Canada, 14 per cent in EU ex UK and 9.5 per cent in UK stocks.
The final portfolio will be made up of between 40-50 global stocks and has an estimated dividend yield around 4-5 per cent, which it aims to grow by 4-6 per cent per year.