What are infrastructure funds?
Infrastructure funds derive their income from infrastructure stocks:
Infrastructure stocks relate to companies whose service offering includes the provision of civil and private infrastructure: construction, power and water and logistics.
Companies within the infrastructure bracket will undertake various projects and contracts in the private sector – digging wells and erecting buildings – but their real earnings often come from being hired by governments to provide the roads, trains, motorways, power stations and other major things that keep countries moving. When a government is in spending mood, this is good for the share prices of the companies competing to win contracts. This is particularly the case in India as a result of the spending plans of Prime Minister Modi that are set to top $59 billion to transform rail, air travel and logistics.
Investors can have exposure to boom time of contracts and spending through investing in funds that pick shares of companies engaging in infrastructure projects. In fact, the most direct exposure to the sector is through investment trusts, which pick such shares and are themselves stock market-listed entities.
What are the pros and cons of infrastructure funds?
One big ‘pro’ is diversification: reducing your risk due having eggs in different baskets. Infrastructure funds – whether trusts or so-called open-ended equivalents such as unit trusts – tend to pick companies that are competing around the world for projects, such as Alstom, the French engineering company. So the companies themselves are diversified in their operations, making them relatively steady players.
Picking steady companies is the reason infrastructure is seen as low in volatility, even as it delivers decent returns. InvestmentNews pointed out that some of the best infrastructure funds on the S&P 500 stock exchange in New York had most of its holdings in companies outside the US.
One ‘con’ of infrastructure funds would be the ‘premium’ that is paid by investors: though investment trusts are technically worth the sum total of the underlying assets, their shares often tend to trade at double-digit premiums, so investors pay significantly more than the assets’ values. So-called open-ended equivalents such as unit trusts tend to be cheaper, as their units of investment increase or decrease in number based on demand and their value doesn’t exceed the underlying asset.
So picking your infrastructure-based investment for your portfolio might require some research! Speak to your IFA.
Are infrastructure funds on the up?
As frontier and emerging markets modernise, they will need better roads, utilities and urban development. Globally therefore, infrastructure is a sector on the up and ever-heading east, even as the US and EU nations also continue to replace old systems. In June, private equity heavyweight Blackstone secured a $20 billion equity commitment from the Public Investment Fund (PIF) of Saudi Arabia, which will eventually be part of a total $100 billion of infrastructure investment.
If your review with your financial adviser is round the corner, pick their brains about the infrastructure funds available through your investment platform, and discuss if it makes sense for your basket of holdings.