Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Ask a group of investors where best to look for income, and you’d be hard pressed to find many who replied ‘infrastructure’.
Perhaps it’s time to reassess. High levels of government investment in the sector and ever-increasing demand for renewable energy sources are putting green infrastructure firmly on the radar, while more conventional income sources - bonds in particular - have found market conditions tough of late.
The fund aims for 5% annual income, which it looks to achieve by investing in other investment companies that own real assets in the renewable energy and infrastructure sectors. Please note this income target is not guaranteed.
It also comes with a sustainability focus and has the potential to protect investors against inflation - an attribute that may prove valuable as inflation expectations rise.
To understand just how the fund sets out to achieve these things, Tom recently caught up with the its manager, Mark Brennan.
Why infrastructure, and why now?
First things first - how exactly do you get an income from infrastructure?
Brennan explains. He and his team look to invest in “mission critical real assets” that support UK society.
Those assets fall into three categories. First, “core infrastructure” like transport, roads, bridges, hospitals, schools, and so on. Second, renewable energy (more on that soon). Third, parts of the real estate market where the UK government supports the underlying tenants - NHS buildings, for instance.
For most the assets he invests in, the underlying source of revenue is coming from the government, usually through long-term contracts. As such, he has a large, sovereign credit paying the bills on long-term, critical assets. That combination makes for, in his eyes, “a very reliable source of income”.
This is a good time for such assets. The UK government has laid out plans for huge investment in infrastructure, particularly that with a green focus. The 2019 Conservative manifesto pledged an “infrastructure revolution” as part of its levelling up plans. In November, the Chancellor, Rishi Sunak, set out the first national infrastructure strategy, worth £100 billion.
Brennan highlights how the government is keen to involve private capital in these strategies. As he puts it: “Given where government balance sheets are post-Covid, the government really needs private capital to get involved so it’s a big opportunity for private investors.”
Rather that investing directly in the infrastructure itself, this fund tends to invest in other companies, or investment trusts, that themselves hold those assets.
The benefit of this structure, according to the manager, is that it gives him the exposure to the underlying assets he’s looking for - the wind farms, the roads, and so on - but lessens the liquidity risk that comes with holding assets on that sort of scale directly. Investors who found themselves locked in property funds which couldn’t raise the funds required to meet redemptions will sympathise with Brennan’s caution. As he explains: “investment trusts basically help us bridge the liquidity gap and get access to the assets that we want.”
Sustainability, inflation, diversification
One of the reasons Tom selected this fund as one of his 2021 picks is its sustainability credentials. The fund’s focus on renewable energy naturally draws it to wind and solar energy companies, as you’d expect.
Brennan sees these as part of a “fairly well understood” story. But he’s also keen to highlight some lesser-understood aspects to the energy transition story which his fund is exploring. He highlights changes in energy storage and efficiency that allow us to decarbonise - electric vehicle charging infrastructure is one example he provides. It’s in areas like these that he’s seeing a lot of opportunities.
Beyond these particular characteristics, Brennan reckons infrastructure has much to offer investors.
The traditional - but no less worthy - benefit is diversification. He explains how his fund offers fairly low correlation to equity markets, meaning its performance bears little resemblance to that of shares.
Another positive is its potential to hedge against inflation. Brennan describes how roughly 65-70% of the fund’s underlying cash flows have an explicit linkage to inflation. In other words: “As inflation goes up, the underlying cash flows go up.”
Inflation expectations are rising, and that bears poorly for bonds, the staple of many investors’ income stream. Combine that with its other potential benefits, and now may be time to think seriously about infrastructure. Find out more about Tom’s picks here.
Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. The Foresight UK Infrastructure Income Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund also uses currency hedging. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Foresight UK Infrastructure Income Fund investment policy means it invests mainly in units in collective investment schemes. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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