By SIMON MOORE 19/01/2012
Infrastructure assets are the large physical man-made bits that make a country work, for example roads, bridges, railways, power lines, utilities, schools, hospitals, prisons, postal services and internet connectivity.
These are expensive to build but should last for generations. They form the backbone of a country and help glue the people of a nation together. As anyone who has played SimCity knows, you need these sorts of infrastructure foundations before your city will grow.
Investing in infrastructure
1. Equities
There are plenty of companies involved in the infrastructure space. These include everything from architects and building contractors to raw material suppliers and project managers. Many of these companies are listed on stock exchanges around the world.
2. Funds of infrastructure-related equities
Funds of infrastructure-related equities also exist. They essentially invest in equities rather than actual infrastructure projects and will have equity-like characteristics. We do not advocate investing in such schemes as they expose investors to the same volatility as equities and don’t add diversity to portfolios.
3. Funds of real infrastructure projects
What we do like are funds of real infrastructure projects. These have completely different profiles from equity funds. A typical infrastructure project or asset has characteristics such as these: long leases (>20 years), income backed by the government, inflation-linked revenues, established legal structures defining the projects and stable (if not growing) asset values.
We prefer the projects to be under the strict legal framework of the Private Finance Initiative (PFI), a method for funding public sector projects with private capital, which are common in UK, Europe, Canada and Australia. Governments cannot renege on their commitments to future payments throughout the life of PFI projects. Do not be duped by the word “infrastructure” in the name of a fund. First find out if it invests in projects or in equities.
The following table lists the four closed-ended investment companies that we rate most highly. Call us on 020 7189 9999 if you need any more information on how to invest in these funds.
All these have values growing at around 8% per annum and dividend yields of 5% to 6%. Asset values are unlikely to be correlated to either equity or bond markets. However all are trading at a premium to asset value of 5% of more.
Investors may prefer to wait until further equity is raised, in order to be able to buy shares at a narrower premium. All four funds are growing by purchasing new infrastructure projects and regularly raise more equity. For example, expect HICL Infrastructure to announce its plans for a C-share fundraise in February 2012.
Historical or current yields quoted should not be considered an indication of future returns. The value of investments, and the income derived from them, can go down as well as up and you may get back less than you originally invested. Due to their nature, specialist funds can be subject to specific sector risks. Investors should ensure they read all relevant information in order to understand the nature of such investments and the specific risks involved. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
This article is provided to help you make your own investment decisions, but is not a personal recommendation or advice to invest. If you are unsure about the suitability of a particular investment, you should seek professional financial advice.