Making the World go Round: Investing in Infrastructure
James de Bunsen,
Investing in infrastructure was previously the preserve of large institutional investors, who prized the sector for its steady and uncorrelated, if unspectacular, returns in relation to other asset classes.
While the long term and potentially illiquid nature of infrastructure may have historically made it more suited to pension funds, the growing range of investment opportunities is attracting retail investors.
Any operation or system in the modern, ultra-connected world relies on infrastructure, which, in turn, global economic growth depends on. As with many investments in the ‘alternatives’ space, its profile has grown in response to the era of ultra-low interest rates.
Retail investors are increasingly interested in the opportunities presented by a new breed of infrastructure funds, a broad and diverse grouping that encompasses investment in everything from transport, utilities and renewable energy (economic infrastructure) to schools, healthcare, prisons and stadiums (social infrastructure).
We include infrastructure within many of our multi-asset portfolios, primarily because the asset class has the potential to generate very attractive real (above inflation) returns.
Historically, UK-listed infrastructure funds have shown they are capable of producing relatively attractive returns in comparison to current UK investment grade bond yields, for example, which yield around 2%*.
Moreover, infrastructure can also add attractive diversification benefits to a portfolio. This is especially the case with social infrastructure, where revenues from assets such as schools and hospitals are ultimately backed by the UK government and are not based on any market or economic cycle.
Strong and stable: not all alternatives are the same
When investing in infrastructure funds we look for quality of assets and management that can demonstrate a lengthy and relevant track record. This seems obvious but the world of alternatives is full of financiers with clever ideas but not, necessarily, hands-on experience.
Meanwhile, the underlying assets must have specific attractive features; for extra diversification benefits we favour social infrastructure projects, given their lack of sensitivity to the economic cycle and implicit government backing.
We believe future prospects for infrastructure investment are also good, despite some negative sentiment stemming from the Labour Party’s proposed nationalisation plans, which would include many regulated and infrastructure assets.
We believe this eventuality remains a very low probability as were Labour able to command a majority in Parliament, it would require several hundred billion pounds to carry out all their nationalisation plans.
Borrowing might be cheap now but with that level of spending on the cards, we doubt lenders in the gilt market will be so accommodating.
In summary, beyond some seemingly remote political risk, we believe that the outlook for infrastructure investments generally appears positive, with strong yields, and high quality, more predictable revenue streams. Moreover, its low correlation to equities makes it a great portfolio diversifier.
* Source: Bloomberg as at 14 June 2019 ICE BofAML Sterling Non-Gilt Index.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.