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Client demand rises for infrastructure funds
13 May 2013
Investec Wealth & Investment sees client exposure increasing year-on-year
Investec Wealth & Investment
Investec Wealth & Investment (IW&I) increased its clients’ overall exposure to infrastructure funds by more than £40m ($61.2m) in the past 12 months and by £60m in the past 24 months.
IW&I has taken on new share issues launched by four of the largest publicly-quoted infrastructure funds, GCP Infrastructure (GCP), International Public Partnerships (INPP), John Laing Infrastructure (JLIF) and HICL infrastructure (HICL). IW&I first invested in HICL at its launch in 2006 and remains one of the top three shareholders.
Infrastructure funds are increasingly gaining in popularity because they offer a healthy dividend with a reliable, long-term income stream that is partly inflation-linked and a relatively low correlation to equities in the pattern of their returns.
The market value of listed infrastructure funds on the London Stock Exchange has risen from £1.4bn to £4.9bn since the end of 2008 as increasing numbers of funds have gained listings shares and existing funds have raised fresh capital.
This trend is likely to continue as the new infrastructure projects highlighted by governments to drive economic recovery will require more private funding in the future.
“With government bond yields and base rates remaining at rock bottom, infrastructure is providing a welcome source of income for many investors and we expect the sector to continue to perform solidly over 2013,” says Chris Hills, chief investment officer at IW&I.
“However, investors are likely to be better off by investing in a secondary issue at close to net asset value rather than buying existing shares in the market at a premium.”
IW&I warns investors to scrutinise the choice of funds carefully to truly understand the risk spectrum. A fund investing in a broad spread of contracts, but with the emphasis on the lower-risk PFI deals, should generate gross returns to investors of around 7% annually and be a very suitable instrument for diversification from equity-oriented portfolios.
If there is greater emphasis on the higher end of the risk spectrum, then expected returns might be more in the 10-11% per annum range. Given higher levels of economic, regulatory or political risk, an investment in such a fund might not provide sufficient diversification from an equity-orientated portfolio.
In the 12 months to March 31, these funds performed favourably compared to the FTSE 100’s total return of 15%. INPP posted total returns of 13%, HICL 14%, JLIF 13% and GCP 16% and share prices have only suffered 60% of the volatility evidenced by the wider stock market and dividends have increased.
Infrastructure funds comprise three distinct areas: social assets such as schools and hospitals, where a private company is paid to make the facility available by building and operating it under a PFI or PPP scheme; economic assets such as train rolling stock and toll motorways, where the private operator is paid based on usage of the asset; and utilities. In line with the evolution of this asset class, IW&I is incorporating the first of these areas of infrastructure as a standard part of their portfolios.