Alternative Investment

Investing in alternative sectors – 2 infrastructure investment ideas

Infrastructure connects our society and provides the foundation upon which economies are built. It includes everything from transport and utility networks to pipelines and satellites orbiting the earth. Without it, we wouldn’t be able to transport goods, power our homes, travel or even communicate with the rest of the world.

The global infrastructure sector is growing and it’s likely to carry on. Infrastructure’s needed to support things like the transition into a carbon-neutral economy and help deal with an increasing global population.

Some of the world’s largest infrastructure projects are currently underway.

The China Belt and Road Initiative, estimated to cost in excess of $4 trillion, aims to build trade between East Asia and Europe, while creating strong maritime links with India and East Africa.

Meanwhile the High-Speed Rail projects in Japan and the US, costing around $53 billion and $96 billion respectively, look to enhance their own domestic travel and trade networks.

Infrastructure could offer some interesting opportunities. But it can be difficult to understand and value and to an extent, hard to invest in.

It’s a specialist area though and comes with more risk. For investors considering this sector, we think it should only form a small part of a diversified portfolio.

This isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember, all investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.

What are the opportunities?

Companies and governments often work together to fund, build and maintain infrastructure projects, like roads or hospitals. Governments tend to have the resources to support infrastructure projects. These projects can be costly and uncertain, so government support is often welcomed. Governments can commit to pumping money into contracts over long periods, which can add certainty to projects.

Recent supply constraints have contributed to rising inflation. Infrastructure assets are typically good at offering some shelter against inflation. Assets like freight rails and marine ports can play a crucial role in improving transport networks and supply chains.

Soaring energy prices have helped drive inflation to heights not seen in decades, but we’re unlikely to stop using essential services like water and gas utilities anytime soon. These are needed regardless of what’s happening in the economy, so their prices can normally be increased – often in line with inflation – without affecting demand too much.

More recently, we’ve seen growing demand for infrastructure that supports a digitally-connected society. The need for high bandwidth and strong online connectivity to help facilitate remote working and communication became more apparent during the pandemic. Cell towers and data centres are set to benefit and could do even better with the adoption of 5G.

Growing concerns over climate change has opened another door of opportunity for investors. The transition to renewable energy resources is likely to drive increased adoption and funding for solutions like solar or wind farms. It’s expected the US bipartisan infrastructure bill will set aside billions to go towards funding these types of power infrastructure assets.

Governments will also need to repair and replace old energy grids to make way for the transition. We hope to see more resilient power grids, along with more efficient energy resources. But this isn’t an overnight fix. It will be costly and take time, so a long-term view is needed.

How’s the sector performed?

The global infrastructure sector has done well over the past ten years, returning 219.41% versus the global stock markets gain of 242.50%. Though this isn’t an indication of how it will perform in the future.

When we look at the sector over the last year, the story is quite different. Infrastructure held up well towards the end of 2021, broadly in line with global stock markets. But so far this year, infrastructure has surged ahead. Over the last 12 months, the infrastructure sector rose 22.79%, versus the global stock markets rise of 3.55%.

Infrastructure assets can pass on higher prices, which is key in an environment of persistently higher inflation. The sector is also being driven by some longer-term trends, which have buoyed some of the different sub-sectors.

The push for digital transformation has caused the demand for data to grow. This means certain infrastructure like cell towers and data centres have performed well. Similarly, the push for renewable resources / the energy transition and enhanced government funding has seen infrastructure companies that develop, own, and operate clean-energy assets flourish.

While some transportation assets like toll roads, rails or airports, are still struggling from the impact of the pandemic, there’s some scope for recovery as traffic volumes are picking up. Though, other market events, including the invasion in Ukraine and worries around the US recession, are likely to put pressure on transportation assets going forward, including freight rail operators and marine transporters.

Infrastructure investment ideas

Some infrastructure companies are listed on the stock market. That means investors can invest directly in their shares. If you don’t have the time, energy or expertise to analyse these companies, you could consider funds investing in a mix of listed infrastructure companies.

Investing in infrastructure projects can have similarities with investing in private equity and can require large sums, making it out of reach for many investors. One way to get around this is to invest in specialist infrastructure investment trusts. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to the net asset value (NAV).

Investing in infrastructure isn’t right for everyone. Investors should only invest when the investment’s objectives are aligned with their own, they understand the specific risks of an investment and there’s a specific need for the type of investment being made. Remember past performance isn’t a guide to the future.

HICL Infrastructure Company

The trust invests in infrastructure assets that are vital to communities, covering sectors like transport, utilities and healthcare. Some of the sectors it invests in are in demand no matter what’s happening in the economy, meaning their prices can increase – often in line with inflation – without affecting demand too much. This trust could help diversify an income-focused portfolio.

HICL Infrastructure Company invests heavily in the UK, with the rest spread across parts of Europe and North America.

Its investments can be broken down into three main buckets – Public-Private Partnerships (PPP) projects, demand-based assets and regulated assets. The managers flexibility to invest in derivatives and use of gearing (borrowing to invest) can increase risk.

PPP projects are where companies and government work together to build, maintain and fund public services. Demand-based assets offer a useful balance to PPP projects as they’re generally less sensitive to certain political or regulatory risks. But they’re typically impacted more by the state of the economy. Regulatory infrastructure assets are those deemed essential, like water or gas utilities.

While the trust has performed well since it launched in March 2006, it has experienced periods of ups and downs, most recently over the start of the pandemic. Over the past 12 months, the trust has shown signs of recovery and returned 7.01%* versus the broader infrastructure investment trust sectors gain of 4.33%.

July 17 to July 18 July 18 to July 19 July 19 to July 20 July 20 to July 21 July 21 to July 22
HICL Infrastructure Plc 5.32% 8.26% 6.92% 6.35% 7.01%

AIC Investment Trust – Infrastructure
9.53% 10.41% 5.00% 5.89% 4.33%

Past performance isn’t a guide to the future. Source: *Lipper IM to 31/07/2022.

More on the HICL Infrastructure Company including charges

HICL Infrastructure Company Key Information Document

First Sentier Global Listed Infrastructure

The First Sentier Global Listed Infrastructure fund aims to deliver income and long-term capital growth. It does this by investing in companies from around the world that run or own infrastructure assets, including those in emerging markets, which adds risk.

The fund isn’t currently on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential. However, we think it could be an option for portfolios looking to invest in listed infrastructure, though there are other funds out there too. Infrastructure is a specialist area. We think it should only form a small part of a well-diversified investment portfolio.

The managers invest mainly in large companies including utilities, transport, energy and communications providers. Energy and utility prices have risen quickly this year. Utility providers, including water, gas and electric, are often able to pass on increasing costs to consumers, meaning some providers have held up well against rising inflation.

While the fund contains a range of investments within the infrastructure sector, it’s concentrated. So each investment can contribute significantly to overall returns, but it can also increase risk.

The fund’s long-term performance has been strong, but at times has lagged the broader infrastructure sector, including in recent years. Over the last 12 months, it’s still managed to return 17.94%* versus the FTSE Global Core Infrastructure 50/50 index’s gain of 22.38%.

July 17 to July 18 July 18 to July 19 July 19 to July 20 July 20 to July 21 July 21 to July 22
First Sentier Global Listed Infrastructure -0.18% 22.07% -10.87% 9.47% 17.94%

FTSE Global Core Infrastructure 50/50
3.53% 21.52% -10.68% 10.94% 22.38%

Past performance isn’t a guide to the future. Source: *Lipper IM to 31/07/2022.

Find out more about First Sentier Global Listed Infrastructure including charges

First Sentier Global Listed Infrastructure Key Investor Information

Investing in alternative sectors – 3 healthcare investment ideas

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