Could roads and railways be your route to solid investment income?

UK infrastructure

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.

Published: 20 September 2016
Last updated: 20 September 2016

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