Is now a good time to back infrastructure?

Infrastructure has become a significant investment theme, as governments around the world recognise its importance in driving economic growth. That has seen billions of pounds spent on everything from building roads, schools and hospitals to enabling technology through digital infrastructure such as data centres.

This enthusiasm is providing plenty of exciting opportunities for investors, with a wide variety of international businesses involved in these projects. Construction firms, utility companies and logistics operators are all important players in this area and high demand for their services is expected to continue.

Here we take a look at the crucial role this sector is playing in global development – and the ways in which you can get involved.

Why is infrastructure so important?

The world is changing at a rapid rate. Emerging countries are embracing urbanisation, while more established regions are updating transport and communication links. The shift from fossil fuels to renewable energy sources is also creating unprecedented demand for infrastructure development.

A staggering $94 trillion of investment is needed across the world by 2040, according to the Global Infrastructure Outlook, a not-for-profit organisation formed by the G20*. The organisation’s annual report emphasised how infrastructure was a “vital catalyst” to ensuring a sustainable future for both humanity and the environment.

“Increasing investment in sustainable infrastructure is more important now than ever before, as the world faces a climate catastrophe, a global economic slowdown, and inequalities that disproportionately affect the most vulnerable people,” it stated.

Where are the opportunities?

Infrastructure’s strong growth is due to public policy tailwinds, particularly in the US and Europe, according to Shane Hurst, a manager on the FTF ClearBridge Global Infrastructure Income fund, which sits on the Chelsea Selection. “We expect the tailwind of public policy to strengthen in 2024, given it will be an election year in many jurisdictions,” he said.

The fund has recently invested in E.ON, the multinational electric utility, which is expected to benefit from Germany’s target of achieving 80% of its energy mix from renewables by 2030**. More broadly, Shane believes there are attractive opportunities to be found within all the regions he focuses on, particularly the US, Western Europe, and Latin America.

“We continue to see excellent opportunities across the infrastructure spectrum, and contracted valuations in 2023 have increased our return expectations,” he added. Valuations moved lower in 2022 in response to rising interest rates, but have stabilised as central banks have paused their hiking cycle.

Another favoured name is United Utilities, a UK-based water company that will settle its next five year regulatory agreement in 2024. “This will likely see an 8-9% compound annual growth in its asset base over the 2026–30 time period and, we expect, a 6-8% real return on regulated equity,” according to Shane.

As well as their capital growth potential, infrastructure assets also appeal to investors because of their income characteristics. Infrastructure assets often throw off high and reliable cash flows, which means many funds pay an attractive income. This has been a useful option for investors when income has been scarce elsewhere.

Three funds to consider

Here we highlight a few funds providing infrastructure exposure – either completely or as part of a wider portfolio – that might be worth considering.

First Sentier Global Listed Infrastructure
First Sentier Investors was one of the pioneers in providing access to this asset class, which quickly captured the attention of income-focused investors. This fund seeks to deliver income and some capital growth by investing in listed infrastructure companies around the world.

Manager Peter Meany is one of the most experienced managers in the space and has been running this fund for over 15 years. We consider this fund an alternative method of playing the global equity market with a thematic bias and a reasonable yield.

The portfolio currently has over 60% allocated to US, with the UK making up just 3% of the final portfolio***. Electric utilities, highways & rail tracks and rail transportation account for over half of the portfolio by sector***.

Schroder Digital Infrastructure
The aim of this fund is to take advantage of the increasing demand for digital infrastructure and the sustainable transition towards a digital economy. The fund’s managers usually hold around 40 global stocks from a combination of emerging and developed markets.

On a sector standpoint, communication services account for almost half of the portfolio at 49%, followed by 34% in real estate and 9% in information technology***.

Currently, the largest individual position in the fund is the 7.4% in Digital Reality Trust Inc, followed by the 7.1% in American Tower Corp***. The fund has a significant tailwind, as demand for data grows, requiring ever more digital infrastructure. The team is highly experienced, with a strong track record on its other funds, and the fund represents a strong thematic option for investors.

M&G Global Listed Infrastructure
This fund invests in a wide variety of infrastructure-related stocks, including utility firms, mobile towers, data centres, and payment companies. Its aim is to deliver a combination of capital growth and income that’s higher than that of the MSCI All Country World Index, over any five year period – and to increase income every year.

The final portfolio, which is built with a buy and hold approach, usually contains between 40 and 50 holdings. Just over 40% of the fund is in US-listed names, with roughly 17% from Canada and 14% the UK. The other countries represented include Italy, France, Australia and Guernsey***.

Manager Alex Araujo recently noted that stock selection had been the key driver of excess return, with the biggest contribution coming from real estate****. “Crown Castle, Alexandria Real Estate, and Segro, all structured as real estate investment trusts (REITs), added the most value,” he wrote.

*Source: Global Infrastructure Outlook, December 2023
**Source: Franklin Templeton, December 2023
***Source: fund factsheet, 30 November 2023
****Source: fund commentary, January 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

Published on 08/01/2024