Rob Morgan is chief analyst at investment broker Charles Stanley Direct.
Infrastructure is an important part of all our lives, providing the essential services to support economic and social activity, like electricity, gas, water and transportation.
It is also constantly evolving.
The transition to net zero carbon calls for huge investment in new, more efficient electricity generation, storage and transmission, not to mention the huge roll-out of charging points that the widescale shift to electric vehicles will bring.
Broadband: Massive roll-out and upgrade projects are under way
Meanwhile, heavy investment in high speed broadband is necessary to connect more people to the internet and improve social mobility.
There are also many common challenges in the emerging markets world such as insufficient basic services such as water and sanitation shortages and rising air pollution.
How do investors make money from these trends?
Income investors: For those seeking income, or a stable component to a portfolio that offsets shares, infrastructure investments can provide steady, more predictable returns.
Assets typically have an important strategic position and face less competition, plus cash flows often automatically adjust to higher prices in the wider economy – offering investors a helpful hedge against inflation.
A particular example is renewable energy generation where higher power prices lead to larger forecast revenues from the sale of electricity to off-takers, though most generators seek to reduce their exposure to erratic shorter term power pricing.
Rob Morgan: Infrastructure provides essential services to support economic and social activity, like electricity, gas, water and transportation
Growth investors: Companies that can help solve pressing environmental and social issues often find themselves in fast-growing markets.
Environmental products or services in the energy efficiency, water and waste markets are all examples. Here the potential return is more often in the form of growth rather than income.
What should investors consider before taking the plunge?
As with any investment there are risks. There can be times when a particular area or theme becomes expensive and isn’t good value.
In addition, infrastructure can be a complex area and there are more specific risks to consider.
Due to local or national importance, key infrastructure is often highly regulated.
Although governments are typically reliable, long-term partners, there is always the possibility they can intervene and, in extreme cases, reduce or constrain an investor’s return, for instance through revoking licences, nationalising assets or projects or changing legislation.
Investment trusts can be more appropriate vehicles to access direct infrastructure assets as they represent stakes in big projects that are not easy to buy into or sold on.
Having a fixed pool of assets, rather than variable in the case of unit trust or OEIC funds, avoids additional lengthy and expensive buying or selling to meet investor demand.
There are a variety of funds and investment trusts focused on sustainable infrastructure and related themes. These range from the very niche such as investment trusts investing in wind or solar farms, to broader funds that invest across a range of areas.
Generally speaking, a reasonable allocation to the theme in a typical portfolio would be around 5-10 per cent.
Over concentration in any one fund or subsector can lead to an unbalanced portfolio that is too dependent on a single investment or type of investments.
What funds and trusts might you consider for your portfolio?
Greencoat UK Wind (Ongoing charge: 0.95 per cent)
This specialist investment trust operates a portfolio of UK wind farms, approximately one third offshore and two thirds onshore.
It generates an attractive income and has performed very well in an otherwise challenging 2022 for investors owing to rising power prices.
However, the slight possibility of a wider ‘windfall tax’ on companies profiting from higher electricity prices that includes renewables has dampened investor enthusiasm recently.
The Renewables Infrastructure Group (Ongoing charge: 0.93 per cent)
This is an investment trust with a broader remit than a specific renewables trust such as Greencoat but a similarly attractive yield of around 5 per cent.
It invests in wind assets (offshore and onshore), solar and battery storage. It is therefore a ‘one-stop shop’ for renewables exposure spread across various geographies, regulatory regimes and technologies.
Wind power: Renewable energy projects can generate an attractive income
Impax Environmental Markets (Ongoing charge: 0.85 per cent)
This trust aims to benefit from growth in the markets for cleaner or more efficient delivery of basic services such as energy, water and waste.
It invests in around 60 global companies and targets long term growth rather than income.
Compared with a more mainstream global equity fund it is biased towards smaller and mid-sized businesses, so it could experience volatility over and above that of the broader stock market.
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