Investor appetite for infrastructure funds continues to grow

Investec Wealth & Investment (“IW&I”) has increased its clients’ overall exposure to infrastructure funds by over £40m over the last 12 months and by £60m over two  years. 

In the past nine months IW&I has invested in new share issues launched by four of the largest publicly quoted infrastructure funds: GCP Infrastructure (GCP), International Public Partnerships (INPP), John Laing Infrastructure (JLIF) and HICL infrastructure (HICL).  IW&I is one of the largest shareholders in these funds having identified the benefits of this asset class several years ago.  It first invested in HICL at its launch in 2006 and has remained one of the top three shareholders ever since.

Over the last year, these funds have performed comparably to the FTSE 100 as shown by the table below.  Share prices have only suffered 60% of the volatility shown by the wider stock market and dividends have been increased.

Infrastructure funds are continuing to gain popularity because they offer investors a healthy dividend with a reliable, long-term income stream that is partly inflation-linked.  They also have a relatively low correlation to equities in the pattern of their returns.  The market value of listed infrastructure funds on the London Stock Exchange has risen from £1.4bn to £4.9bn since the end of 2008 as increasing numbers of funds have gained listings shares and existing funds have raised fresh capital.  This trend is likely to continue as the new infrastructure projects highlighted by government as drivers of economic recovery will require more private funding in the future.

Chris Hills, Chief Investment Officer at Investec Wealth & Investment, said: “With government bond yields and base rates remaining at rock bottom, infrastructure is providing a welcome source of income for many investors and we expect the sector to continue to perform solidly over 2013.  However, investors are likely to be better off by investing in a secondary issue at close to net asset value rather than buying existing shares in the market at a premium.”

Infrastructure funds comprise three distinct areas: social assets such as schools and hospitals, where a private company is paid to make the facility available by building and operating it under a PFI or PPP scheme; economic assets such as train rolling stock and toll motorways, where the private operator is paid based on usage of the asset; and utilities.  In line with the evolution of this asset class, IW&I is incorporating the first of these areas of infrastructure as a standard part of their portfolios.

However, IW&I warns that investors need to scrutinise the choice of funds carefully to understand where they stand on the risk spectrum.  A fund investing in a broad spread of contracts, but with the emphasis on the lower risk PFI deals, should generate gross returns to investors of around 7% annually and be a very suitable instrument for diversification from equity oriented portfolios.

If there is greater emphasis on the higher end of the risk spectrum, then expected returns might be more like 10-11% per annum.  Given higher levels of economic, regulatory or political risk, an investment in such a fund might not provide sufficient diversification from an equity-orientated portfolio.

For more information on IW&I in the UK visit investecwin.co.uk.