Building a portfolio: why infrastructure is ‘flavour of the month’

The investment world is not so much GUBU as VUCA; it’s volatile, uncertain, complex and ambiguous. And the holy grail for many investors is certainty. They are willing to trade off a certain amount of return for a degree of certainty and that’s what infrastructure funds offer – the prospect of positive returns over a long period.

As the name suggests, the funds are based on investments in various types of infrastructure such as toll roads, electricity networks, water schemes, telecommunications networks and the traded stocks of companies which own such assets.

"They typically invest in anything that runs an economy such as electricity, oil and gas, railways, airports, ports, mobile phone masts and things like that," says Paddy Swan of pensions and investments consultant Invesco. "They are quite attractive from an investor's perspective. They tend to participate well on the upside with equities but don't tend to mirror the decline as much. They represent a defensive holding."

According to KPMG partner Michele Connolly, they have become somewhat of a "flavour of the month" of late with certain categories of investor. "They are not new," she says. "The concept has been around for quite some time but has become more prominent and topical of late. Investors are searching for yield and long-term sustainable revenue streams. Pension funds are looking for long-term secure returns and are turning to infrastructure funds which can offer returns of up to 4 or 5 per cent annually over 30 years as well as security."

One of the advantages for pension funds is the arm’s-length nature of the investment. “Pension funds don’t want to invest directly in assets like this as they don’t have the expertise to manage them,” Connolly explains. “The funds do all the hard work for them. They also spread the risk. If you are in a fund, there is a diversified portfolio of assets. Portfolio theory says if one thing goes wrong then 10 will go right.”

Some disadvantages

There are some disadvantages. “They can be less liquid than other investments,” Connolly notes. “They are not necessarily all tradable. It’s the same with any fund.”

Swan agrees: “There is a liquidity issue. That’s why we’ve gone for listed funds.”

Invesco has chosen the First State Global Listed Infrastructure Fund, which invests at least 70 per cent of its assets in listed shares of companies that are involved in infrastructure. In the 12 months to the end of November 2019, the fund had achieved a return of 19.9 per cent.

“We can get out if we need to, it’s priced twice daily,” adds Swan. “From an active manager’s perspective, it beat the benchmark for the year last year. Some might classify it as the same as equities. On the spectrum of risk where emerging market equities would score seven out of seven on the ESMA [European Securities and Markets Authority] scale and global equities would score six, infrastructure funds would be about five. It would be at the lower end of the higher-risk part of the spectrum.”

"I don't want to say they are without risk," he adds. "One of the companies the fund invests in is Pacific Gas & Power, a power company in California that suffered badly as a result of the fires there. In California, if it can be proven that a fire started because of one of your power lines, you become liable for the costs of the fire and you can only insure for some of that."

The company filed fire bankruptcy early in 2019 as a result of the mounting costs of these fires. Later in the year, the company agreed a $13.5 billion settlement with victims of one of the fires.

Outlook remains positive

Notwithstanding that, the outlook remains positive for infrastructure investments, according to Connolly. “We are definitely seeing more of it. A lot of insurance companies and pension funds want infrastructure as part of their portfolios. Some companies such as Aviva have their own funds. The other thing we can see is a pension fund investing where they have currency needs. Where they are paying out in sterling, they can go for sterling yield. Sovereign wealth funds are getting into it as well and in this country we have the Irish Infrastructure Fund managed by AMP Capital. Lots of the major investment banks like Macquarie also have infrastructure funds aimed at different investor appetites. These funds might be focused on European, emerging markets, development assets or mature infrastructure and are aimed at different investor appetites.”