There’s always something comforting about investing in a structural trend that goes beyond any political rhetoric. 
Take Asia, for example. The long-term trends are only going to go one way, as the population, and the middle-class within it, continues to grow, making it an attractive story for investors. The same is true for infrastructure - whether it is roads, airports, hospitals or schools, it is an essential element of modern society and the economy.
As a low beta, defensive asset class, the attractions of infrastructure investing are not new to retail investors. It also has a link to inflation – a big buzzword in markets at the moment – 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.
But it is the income element which has stolen the show. In a world of low interest rates, this asset class has fed a lot of yield hungry investors. Performance has not been too shabby either. In the past 10 years the FTSE Global Core Infrastructure sector has returned 161.2 per cent (vs. 191.4 per cent for the MSCI World)* – that’s not bad at all for a low beta, defensive asset class. A closer look tells us infrastructure was actually outperforming global equities until the recent bounce back in markets in 2020.
However, I believe there are a number of elements which are starting to make infrastructure even more attractive, particularly on the back of Covid-19. For example, governments across the globe are not revisiting the austerity route they chose following the global financial crisis, preferring to spend their way out of trouble, offering jobs to stabilise their respective economies through infrastructure projects.
We are also seeing a widening of the asset class, particularly with the growth of green infrastructure and carbon neutrality – a trend even the Chinese have committed to. The election of Joe Biden in the US should also boost infrastructure spending, with areas like renewable power generation and electric vehicles in the utilities sector, particular targets.
Let’s take the UK as an example to cover both of those points. I recently read a note from Aviva managing director of infrastructure Darryl Murphy which highlights the focus on infrastructure investment as a key part of the economic recovery, such as prime minister Boris Johnson’s 10-point plan for a green industrial revolution. Events driving growth in 2021 in the UK include the launch of the National Infrastructure Bank (NIB); the start of the UK’s legally binding target of net zero carbon emissions by 2050; while the fibre-to-the home drive will also continue – particularly as the government has a target of 85 per cent gigabit-capable coverage across the UK by 2025.
The growth of green infrastructure has been a big driver in broadening the asset class out. Gone are the days when you could consider infrastructure investing as one entity – you now have to dig deeper in the respective sub-sectors. There are parts like toll roads and airports which have struggled courtesy of the pandemic, by contrast rail travel could benefit in the more immediate future.
ClearBridge portfolio manager Nick Langley points to governments looking to use the “new normal” brought about by the pandemic to change consumer behaviour when it comes to travel – he says Europe is incentivising rail over air travel, promoting 2021 as “the year of rail” - to reduce transport sector emissions. Don’t expect that idea to go away when Covid is finally put behind us.
Utilities is another area Langley is bullish on, citing the impact of the pandemic on this area as being negligible due to their “service nature, supportive regulation, importance in leading the decarbonisation of economies and their social importance as major employers”.
The final point I wanted to make is that all of these steps are being made not only to innovate but to renovate. In 2015, consultants McKinsey said that between 2017 to 2035 there would be a $69.4trn required investment spend into global infrastructure, of which Asia would account for more than half of the demand for investment**. Research from Oxford Economics says it is the Americas where the figures are most concerning, as they found there is a 47 per cent gap between the expected infrastructure investment spend and what is actually needed^.
The principal reason for this shortfall is the cost burden on governments to fund these projects. The result is a shift away from the public sector dominating the market – as it did in the 1980s – to more private companies becoming involved and carrying the risk, although in the case of sectors like renewables and hospitals, they have been supported by governments globally.
Those wishing to access the asset class may want to consider the First Sentier Global Listed Infrastructure fund, managed by Peter Meany and Andrew Greenup.
The managers build a 40-strong portfolio which specifically targets economically sensitive assets with barriers to entry and pricing power. Largest exposures at present include electric and multi utilities (41 per cent) and highways and rail tracks (11 per cent)^^. The fund has returned 197 per cent since its launch in 2007^^^ and has an historic yield of 2.9 per cent^^.
Investing in 40-50 companies, the M&G Global Listed Infrastructure fund, managed by Alex Araujo, is another alternative.
Another option is the VT Gravis UK Infrastructure Income fund, which invests mainly in investment trusts exposed to different types of UK infrastructure. The fund has an income target of 5 per cent which is distributed quarterly and can invest in both infrastructure debt and equities. It has a minimum of 22 holdings but will have exposure to around 1,000 separate underlying projects.
Darius McDermott is managing director at Chelsea Financial Services. The views expressed above are his own and should not be taken as investment advice.
*Source: FE fundinfo, total returns in sterling, 18 February 2011 to 18 February 2021.
**McKinsey, Bridging Infrastructure Gaps: Has the world made progress? October 2017
^Source: Oxford Economics, Global Infrastructure outlook (July 2017)
^^Source: Fund factsheet, 31 January 2021
^^^Source: FE fundinfo, total returns in sterling 8 October 2007 to 18 February 2021
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. Darius's views are his own and do not constitute financial advice.