Why I Believe There Is Merit In Investing In Infrastructure
01 Dec 2011
So George Osborne, Chancellor of the Exchequer, thinks that investing in infrastructure is going to help to steer the UK towards growth and recovery. Construction of new homes and rail lines will create jobs and push money into the economy which is exactly what the UK needs right now.
Infrastructure is certainly a compelling investment theme, but for the private investor one which has more appeal on a global basis where there is soaring demand for urbanisation, industrialisation and globalisation driving the need for dramatic improvement in infrastructure.
At present there are unprecedented investment opportunities. Emerging Market infrastructure spending projects are forecast to reach over $21 trillion. As people move from the country to the city (over 350 million are forecast to move between 2010 and 2015 according to the World Bank) to find work, this places a strain on basic services in the cities and creates urgent demand for new development.
Meanwhile, demand for exports has over stretched infrastructure which in many cases is weak as a result of years of under investment. Economies have a pressing need for increased capacity if they are to maintain and extend their competitive advantage (especially Emerging Markets). As a result investment in power stations, airports, power stations and other infrastructure has become a key priority for regional businesses and governments.
Many Emerging Market countries have undergone meaningful economic and structural reforms over the past decade, increasing their ability to fund large infrastructure investments and the pace of expenditure has only been quickened by the financial crisis, as governments have used infrastructure investment as a means of stimulating economic growth.
Infrastructure funds may suit investors who already have a globally diversified portfolio and now want to expand into riskier investments to potentially enhance their returns. Infrastructure is a long term investment opportunity offering the potential for stable inflation linked income, diversification and capital growth.
Infrastructure is an asset class which is typically characterised by predictability rather than volatility, predictable user demand, predictable long term growth and income over time.
Investors should only really consider a small allocation to their portfolio, depending on their attitude to risk, allocating typically no more than 5% to 10%.
It could be used as a ‘real asset' compliment to commercial property or as a diversifying tool for an investor's global equity allocation. Also it could be used as an alternative inflation hedge to bonds.
If you are considering adding infrastructure to your portfolio, funds to consider are:
JP Morgan Emerging Markets Infrastructure Fund managed by Richard Titherington. This is a fund which is very high risk, but has a very low yield, so not one to consider for income. It is a specialist Emerging Market fund, so not for the feint hearted but long-term offers strong prospects as it invests in companies who benefit as governments and businesses build infrastructure for the next phase of emerging market growth.
CF Macquarie Global Infrastructure Securities Fund managed by Justin Lannen. The fund is much less volatile than some of its counterparts and offers a low yield of 1.9% currently. It aims to provide investors with income and long term capital growth by investing in a global portfolio of 40-50 infrastructure securities, diversified across regions and sub sectors.
First State Global Listed Infrastructure Fund managed by Peter Meaney and Andrew Greenup. Another fund with reasonably low volatility, it currently offers a competitive yield of 3.1%. A much larger and longer established fund, it aims to achieve a total investment return consistent with income and long term capital growth. This fund is the most highly rated by the independent ratings agencies.
Tom Biggar is Head of Investments at TQ Invest. Follow Tom on Twitter.
