April 17, 2009 6:16 pm

Infrastructure offers sound building blocks

Investors looking to improve their income are being steered towards infrastructure funds, which are paying solid dividends.

Governments around the world are ramping up spending on infrastructure to stimulate economies and create jobs. US President Barack Obama has pledged to pump tens of billions of dollars into areas such as bridges and roads, in the biggest infrastructure investment in the US for 50 years. Meanwhile, other developed countries are upgrading transport networks and emerging countries such as China are expanding their infrastructure.

Funds that specialise in infrastructure are seeing increased interest from investors and a number of new such funds have sprung up to meet the growing demand.

However, there are still relatively few ways for investors to access this sector. Only a handful of funds specialise in infrastructure and these tend to be new so there is little record of past performance.

“It’s a very limited area,” says Randal Goldsmith, director of fund research at Standard & Poor’s. “There was a lot of interest 18 months ago and a sudden inflow of money, but when the stock market went bad, that dried up.”

As a result, the concept of investing in infrastructure has still not quite caught on with retail investors.

But analysts insist the funds can offer good value to investors, particularly given their relatively robust income streams.

Ben Yearsley at Hargreaves Lansdown recommends the open-ended First State Global Listed Infrastructure fund, which he argues is the best for diversification.

“I look at it as another version of an equity income fund,” he says. “You have high levels of income – around 5 per cent – and steady but not spectacular growth.” He classes the First State fund at the lower end of the risk scale for a global equity fund.

Other open-ended funds include Macquarie Global Infrastructure Securities, which invests mostly in the developed world, while others such as Invesco’s Asia Infrastructure fund, focus on the developing world.

Open-ended funds can be more subject to stock market fluctuations, as they tend to invest in the securities of infrastructure companies rather than directly in assets. This can be seen from the relative performance of closed versus open-ended funds – the latter lost more than 25 per cent in the past year, while the investment trusts lost just under 10 per cent on average.

Analysts rate infrastructure investment trusts particularly highly, pointing to their recent results for 2008, which were generally strong.

Robbie Robertson, head of investment companies at Collins Stewart, says investors are increasingly attracted to the funds because they pay secure dividends.

“The general infrastructure space is one where we feel the relative security of income will attract more and more investors,” he says.

“These companies are investing in things that are essential to society and the payments are either being paid by the government or come with a degree of predictability, such as toll roads.”

He also points to the good range of options for investors. While there are only three investment trusts specialising in infrastructure, they have quite different risk profiles. HICL is usually seen as the lowest risk, while 3i Infrastructure is higher risk and Babcock & Brown Public Partnerships is somewhere in between.

HICL’s business model is seen as low risk because it invests in government contracts for infrastructure projects and receives its income from the government. B&BPP exposes itself to construction risk by opting for assets that are not yet built, unlike HICL, while analysts are wary of the fact that 3i Infrastructure is not yet fully invested.

Analysts at Numis have warned that the 3i fund may struggle to maintain its 12 per cent annual target return in the short term, as it is sitting on a pile of uninvested cash from which it will not be seeing much income given current low interest rates.

B&BPP last month unveiled a 5 per cent rise in net asset value in 2008, leading analysts at Numis Securities to argue that the shares should be rerated to a single rather than a double discount.

Because B&BPP shares are trading at a higher discount than HICL – an 11.1 per cent discount compared with a 7.4 per cent premium, Numis analysts have suggested that short-term investors could switch from HICL to B&BPP, though they believe HICL’s long-term investment case is solid.

Analysts at Oriel Securities agree. They downgraded HICL from a buy to a hold this month, arguing that the more difficult market conditions are having an impact on asset valuations.

The investment trusts can also offer good diversification away from the UK. While HICL is UK-focused, B&BPP has been steadily moving out of the UK and now holds nearly half its portfolio in other countries.

Robertson also recommends MedicX, a fund that specialises in private care homes, buying them directly then receiving income from the government. This makes it more of a hybrid fund, part infrastructure and part commercial property, on a yield of 7.7 per cent.

Analysts believe infrastructure is likely to become more popular with investors. “I’m sure infrastructure is an area where we’ll see more funds in the future,” says Goldsmith. Robertson agrees: “I think this is here to stay. It takes it back to investing roots as you’re investing in real assets and you can quantify the income growth. It’s not something which is a fashion.”

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