As investors grapple with low interest rates and a rollercoaster ride on the stock markets, we look at how infrastructure assets provide an alternative for those in search of income and growth.

 

Macropolitical and economic events continue to drive the fortunes for the global equity and bond markets in early 2020. For UK investors, the build up to the December General Election increased volatility in the markets, which has continued into the new year with rising tensions in the Middle East, trade wars continuing and the outbreak of coronavirus. This has created additional volatility within the financial markets and created uncertainty for investors across the globe.

At the same time some global stock markets look expensive and have recently traded at near all-time highs, meaning that in addition to navigating market volatility, equity investors must also contend with high valuations.

Global interest rates also remained low: 0.75% in the UK, while the European Central Bank kept the rate at 0% and the Federal Reserve lowered rates in the US last year to 0.5%.

Such challenging market conditions mean investors must continue to look outside of traditional stocks and bonds for reliable sources of growth and income.

Given the influence of external political and economic events on traditional asset classes, it can make sense to look at investing in alternatives that offer performance less dependent on the wider markets to deliver attractive risk-adjusted returns. By including alternative assets – such as infrastructure, real estate, private equity, and hedge funds – to a diversified portfolio, investors may be able to lower volatility; manage inflation risk; enhance risk-adjusted returns; or increase income.

Indeed, according to a TIME Investments’ survey of professional advisers published in January 2020, 42% of adviser’s clients are now investing in infrastructure such as renewable energy, utilities, transport and logistics and social infrastructure.

Key characteristics

Infrastructure is defined as the basic services or social capital of a nation, which bolsters economic and social activities and includes roads, airports, municipal housing and hospitals. Projects are usually asset backed, with an element of pre-determined cash flows to the investor and often enjoy the security of high quality counterparties such as the government. As such, the asset class can help solve many of the investment challenges facing today’s investors.

First is through diversification. The infrastructure sector comprises many kinds of projects from  schools to renewable energy, telecommunications to airports, they all provide crucial services to the economy and have a low correlation to traditional asset classes. This means, they have the ability to protect portfolios from downturns in the economic cycle (downside mitigation).

Infrastructure also offers investors consistent income with capital growth prospects through sustainable and regular dividends. Importantly infrastructure is typically a lower volatility asset class, and can be used to enhance risk-adjusted returns.

Investing in infrastructure assets can also insulate against rises in inflation since they can have income streams directly linked to the rate of inflation, protecting income returns in real terms.

Government commitment

In 2019, Chancellor of the Exchequer at the time, Sajid Javid committed to spending 3% of UK GDP on national infrastructure. The announcement continues the commitments made in the 2016-2021 National Infrastructure Strategy which pledged £300 billion to UK projects. The government says it will prioritise investment in renewable energy, and improving transport networks, hospitals and schools. This creates ample opportunities for investors seeking long term, stable projects. In fact, the UK is one of the most attractive countries for renewable energy and infrastructure investment, and in the past few years the listed infrastructure sector has achieved attractive returns; stable dividend growth; and consistent premium ratings.

Social benefits

Investing in infrastructure has the potential to enhance portfolio returns as well as delivering wider social and environmental benefits. Many infrastructure projects aim to have a positive impact on the lives of local communities either through enhancing transport networks, rejuvenating schools and hospitals or creating new industries. Supporting renewable energy, rail networks, and healthcare and social projects offers the chance to improve long term returns and secure the economic and environmental future for local and national communities.

Accessing infrastructure

Direct allocations to infrastructure projects can be challenging for those without huge sums to invest. However, listed infrastructure funds, pool allocated capital from many smaller investors to a wide range of projects, which in turn results in a more straightforward and liquid way of accessing the asset class.

For example, TIME:UK Infrastructure Income invests in a well-diversified portfolio of high-quality asset-backed infrastructure and renewable energy securities, targeting a consistent income return with capital growth. Launched in April 2018, the Fund has total returns of 23.84% since inception and 9.68% in the year to 31 January 2020, inclusive of income of 4.91%, far outpacing inflation.

Across 21 holdings the fund comprises infrastructure; renewable energy; secured lending; and real estate companies. However, since the Fund invests in listed investment trusts, the Fund has exposure to more than 1,200 underlying assets across the wider infrastructure and real estate sectors. This extensive universe provides the diversification investors in infrastructure need, and with volatility of just 5.16% it provides a smoother ride than wider equity markets.

Outlook

The political and economic outlook shows no sign of calming. With the UK now out of the EU and the outlook for global growth still muted, investors need to widen their nets. Infrastructure offers plenty in the way of alternative benefits to traditional asset classes and a diversified, professionally managed fund makes access easy. However, as with all investments it is not without risk and investors should seek professional advice before exploring this opportunity.

For more information on TIME:UK Infrastructure Income, please get in contact via 020 7391 4747 or email questions@time-investments.com

Listen to our recent webinar on TIME:UK Infrastructure Income here. 

Infrastructure investment characteristics

  • Diversification: Low correlation to other asset classes.
  • Consistent income with capital growth prospects
  • Lower volatility
  • Inflation protection
  • Downside mitigation
  • UK focus

Proposed government infrastructure projects

  • Extend access to full fibre broadband services across the country, with subsidised provision in rural and remote communities
  • £600 million for new homes
  • 50 per cent of the UK’s electricity should come from renewable sources by 2030
  • 20 hospital upgrades
  • Creating a charging network for electric vehicles
  • £43 billion funding between now and 2040 to develop strategies for improving local transport networks
  • A national resilience standard to protect communities against the risk of flooding

 

 

Posted: 20/02/2020 Categories: Income, Infrastructure, News, TIME:UK Infrastructure Income