Speaking at the recent Conservative Party Conference in Birmingham, Chancellor Philip Hammond reaffirmed that he has ditched George Osborne’s target to achieve a budget surplus for the UK by 2020. He also signalled an appetite for increased fiscal measures to support the UK economy during its divorce from the European Union. One of these measures is increased spending on infrastructure.
While further details are expected to be forthcoming in the Autumn Statement on 23 November, these measures might include tax cuts. As infrastructure is set to become an increasingly prominent investment theme, we show you the routes for investing in infrastructure in this article.
Infrastructure goes beyond the UK
Although the headwinds created by the UK’s decision to leave the EU drive the shift in the Government’s thinking, the UK is not alone in seeing a recalibration towards fiscal policy after years of reliance on monetary policy. After years of ultra-low interest rates and unconventional measures, such as Quantitative Easing and negative interest rates, Central banks across the globe have reached the limits of their policy arsenal. Governments are waking up to the need to do more with the levers at their disposal, namely tax and spending decisions.
By way of example, the Japanese Government announced a fiscal stimulus package with a headline value of US$45 billion in early August. Both Hilary Clinton and Donald Trump are advocating increased infrastructure spending and changes to taxation in their campaigns for the US Presidency. European Governments may follow suit, with both France and Germany facing elections in 2017. Infrastructure is therefore going to be an increasingly prominent investment theme, going way beyond the UK.
How do you get a piece of the action?
For investors, investment in infrastructure – such as transport networks, utilities, schools, hospitals and prisons – has clear attractions during times of economic uncertainty. These projects are typically underpinned by very long-term legally-binding contracts, which are often with state entities. They provide very predictable revenues that often include annual inflation adjustments and they are not highly sensitive to the economic cycle. Indeed, some projects have monopolistic characteristics.
The dilemma for retail investors is how to get a piece of the action? There are really two routes for investors to access infrastructure: through listed investment companies that are exposed to operational projects and through the shares of companies focused on infrastructure.
Investing in investment companies
The listed investment companies offer both asset class diversification and the elixir of income yield – the average vehicle in the AIC Specialist: Infrastructure sector currently yields 4.5%. The problem is that because the yields are so attractive at a time when yields on many other asset classes are so low, these investment companies are all trading at eye-popping premiums to Net Asset Value (NAV). The average investment company in the sector now towers at a 16.5% share price premium to NAV, which many will find too steep. There are likely to be further fund raisings by these investment companies if there is a marked uptick in infrastructure projects as expected, and this could provide a more palatable entry point than buying shares on the secondary market. However, previous ‘tap’ issues, where such companies raised additional funds, have been so oversubscribed that even new shares have been issued at premiums to net asset value. We highlight some companies below.
HICL Infrastructure: this Company’s investment portfolio has stakes in 106 infrastructure projects, which are mainly operational social and transportation infrastructure schemes with public sector clients. These include the A249 road in Kent and Southmead Hospital
International Public Partnerships: this global infrastructure company has over 100 projects in the UK, Europe, Australia and North America. In time it will have projects in other parts of the world. Projects include schools, transport and even police stations
John Laing Infrastructure: this company has a portfolio of 59 infrastructure projects with sectoral and geographic diversification. Street lighting is one such sector, for instance projects include the installation and maintenance of street lighting in areas including Lambeth, Enfield and Barnet
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Investing in infrastructure equity funds
Alternatively, there are several infrastructure equity funds available. These don't offer up the same level of yields as investment companies owning actual operational projects and are essentially equity funds, but they do offer global exposure to the infrastructure theme.
Lazard Global Listed Infrastructure Equity: this fund focuses on ‘Preferred Infrastructure.’ These are businesses that provide essential services and have monopoly-like characteristics. Examples of non-UK companies owned in the portfolio include US rail firm Norfolk Southern, Italian company Altantia (which manages toll roads in Italy, Brazil, Chile, India and Poland as well as Rome airport) and Australian group DUET, which owns energy utility assets such as gas pipelines.
Other established infrastructure equity funds include First State Global Listed Infrastructure and CF Macquarie Global Infrastructure Securities.
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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance. Investment trusts are similar to funds in that they provide a means of pooling your money but they are publicly listed companies whose shares are traded on the London Stock Exchange. The price of their shares will fluctuate according to investor demand and changes in the value of their underlying assets. 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.