Could roads and railways be your route to solid investment income?
Commercial property has been one of the last remaining bastions of reliable yield, although the sector has faced its own challenges since the Brexit vote, with some funds temporarily suspending trading.
So those seeking income need fresh options. Over the past few months, I’ve been talking a lot about infrastructure.
The sector is about much more than just roads and railways. It encompasses a wide variety of assets that provide core services and facilities, including doctors’ surgeries, hospitals, libraries, schools, prisons, social housing, ports and renewable energy.
The longevity (and often government backing) of many of these projects means the infrastructure sector tends to be less volatile than the stock market as a whole. Earnings are typically resilient and predictable, and their long-term nature means the cash flows from many infrastructure investments can be contractually linked to inflation.
This in turn means infrastructure ticks a lot of boxes right now.The wider UK stock market, while up over the year to date, has had a rough ride along the way. Infrastructure equities’ performance has been smoother and, in the lead-up to and immediate aftermath of the EU referendum, the sector was clearly in favour. UK investors’ returns from global infrastructure were also given a boost by the fall in sterling.
Furthermore, central banks around the world have been lowering interest rates and providing monetary stimulus for years without much success in terms of expanding the economy. In this environment, the next logical step is for governments to pump in more money via what we call fiscal stimulus – essentially, spending programmes to generate economic activity.
Infrastructure is a likely target for this kind of support, as it tends to have a positive effect in terms of employment.
Indeed, the UK government’s National Infrastructure Plan proposes a £411 billion infrastructure spend by 2020/21, with funding costs shared between public and private enterprises. But how can individual investors get exposure to these large-scale projects?
In the world of infrastructure funds, there are open- ended investment companies (Oeics) and there are investment trusts, which are closed ended. Unfortunately, infrastructure’s desirability in the current climate – and especially since the Brexit vote – has pushed up the premiums on investment trusts, making them quite expensive. So while I would usually recommend one or two of each, at the moment I think Oeics are the way to go – although it is worth noting that they too have seen significant gains post-referendum.
I particularly like the First State Global Listed Infrastructure fund, which focuses on both income and capital growth for investors. First State has been a pioneer in providing access to the asset class, and the fund is recognised as a leader in its field. As the chart shows, the fund has proved to be an attractive defensive play by falling less dramatically than the market in downturns, while still outperforming over the long term.
For a real income focus, two new funds have launched this year, each targeting a yield of around 5%. One is Legg Mason RARE Global Infrastructure Income, run by a team of 13 specialist infrastructure professionals who place a heavy emphasis on the certainty of future revenues when selecting assets for the fund.
Another is VT UK Infrastructure Income, which offers concentrated UK exposure. While it has a very credible mandate, which it has delivered on well during its short history, it is worth noting that this fund does hold some investment trusts in its portfolio.
- 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. Mr McDermott’s views are his own and do not constitute financial advice.
Darius McDermott is the managing director of Chelsea Financial Services and FundCalibre.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).