Infrastructure funds can offer investors a good source of income, but what are the risks attached to these funds?
Infrastructure funds fall into two camps: closed-ended vehicles that buy the actual infrastructure assets themselves and rely on the cashflow from those assets for returns, and open-ended funds that invest in listed infrastructure and infrastructure-related securities.
The funds also offer inflation-linked income, as revenues tend to be linked to inflation. For example, toll roads offer revenue streams pegged to the consumer price index, plus 1 or 2 per cent.
Premier Asset Management pooled funds investment director David Hambidge has about 8 per cent of the £103m Premier Multi Asset Distribution portfolio in infrastructure funds.
He says infrastructure is the biggest theme in his alternatives weighting, as these funds offer reliable cashflow for investors.
Hambidge adds:”The companies we invest in are buying basic physical social infrastructure like schools, hospitals, prisons and roads. These assets should continue to throw up effectively Government-backed cashflow, whatever the ebbs and flows of the economy.”
But Rathbones head of multi-asset David Coombs does not agree that cashflow from infrastructure funds is reliable.
He says: “With UK-focused infrastructure funds you are dealing with one source of cashflow, which is the Government. Governments pay 6 or 7 per cent on infrastructure contracts and I am not sure how sustainable that is. The taxpayer may push back on that at some point. I am nervous about politically influenced investments. Governments tend to change things retrospectively.”
Because of these risks, Coombs is cautious about holding infrastructure funds and holds only the £462m First State Global Listed Infrastructure fund. The £42m Rathbone Multi Asset Total Return portfolio has a 5 per cent holding in the fund.
Coombs says: “The manager of the First State fund can switch between cyclical stocks such as airports and defensive ones. In infrastructure asset-backed investment trusts, you are buying into and relying on the cashflow that the project delivers.”
Coombs says risk in infrastructure funds is hard to analyse because income is partly linked to inflation.
He says: “Planning your entry and exit points into these funds is quite difficult. The valuation of the fund is based on future inflation rates. If inflation does come down, it can bring the value of the funds down.”
City Asset Management research director James Calder says investment trusts have a good level of yield and protect well against market movements because their underlying assets are direct investments, not equities.
He says that while investors tend to buy the trusts for income, they are also now creating some capital growth as they are in high demand from investors. As more investors buy them, the price is pushed up.
But Calder says he avoids investing in emerging market infrastructure funds because he sees them as too risky.
He says: “We do not invest in emerging market infrastructure funds, as you are not paid enough return to take on the risk. Infrastructure should be a low-volatility asset class, producing an attractive yield.”
Hargreaves Lansdown senior investment analyst Meera Patel disagrees. She says emerging market infrastructure funds could offer an opportunity for investors.
She says: “I am not adverse to the emerging market story. You have to be careful in terms of portfolio construction that investors are not doubling up on the weighting to infrastructure, as general emerging market funds tend to play the infrastructure theme.
“There is the risk in infrastructure funds that there may be not enough government support behind projects. We have seen the UK Government’s cuts in spending and if there came a point where governments did not have enough money to pay for infrastructure projects, it may have a short-term impact.”
Whitechurch Securities managing director Gavin Haynes says he prefers developed market infrastructure funds.
He says: “The emerging market end is the riskier end of investment as there are more uncertainties in these markets. So we tend to prefer the more developed market infrastructure funds.”