Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Infrastructure sector.
Infrastructure is a relatively new Investment Association sector, launched in September. It has 20 members, although only nine of these have five-year histories. Hence the table this month is slightly truncated. Nevertheless, I thought it worth a look, if only for one reason—inflation.
With UK inflation trending sharply upwards—soaring through expectations to hit 5.1% in November—assets that offer inflation protection look increasingly attractive. However, investing in infrastructure—often viewed as a bond proxy—seems intuitively wrong, as bonds underperform when rates rise. Listed infrastructure is seen as a bond proxy because much of the return comes through dividend payments and the capital-intensive nature of many infrastructure sectors makes them rate sensitive. This is because rising rates increase debt servicing charges. Rising rates also increase discount rates, therefore squeezing valuations by reducing the value of expected future returns.
But there are attributes to infrastructure assets that are attractive in just these conditions. The cash flows of many infrastructure companies are inflation-linked, offsetting the negative effects of rising rates. This is particularly the case for regulated utilities, where regulation or contracts can link end-user charges to inflation. It is, therefore, real rather than nominal rates that infrastructure investors need to watch most closely. Where inflation rises faster than rates—precisely what we’re seeing now—infrastructure assets tend to do well.
Sustainable Income
Infrastructure also has a vital role to play in the delivery of a sustainable economy. Whether in the US’s Green New Deal or the Green Deal in the EU, infrastructure is its backbone. Aside from the fact that, if governments are to be believed, sustainable projects are going to take an increasing share of the infra market, there are good reasons why infra investors would want to tilt their portfolios in this direction. Climate change and related regulatory action make those businesses most exposed, or those who are slow to react such as oil and gas pipelines, increasingly vulnerable to adverse action. Conversely, investing in assets such as wind farms or electricity grid providers, give access to sustainable—in both senses of the term—income streams, with relatively lower volatility than some of the jazzier areas of renewable energy. It’s therefore no surprise that seven out of the 20 sector funds are flagged as Ethical by Lipper.
Over three years, sector returns range from 67.2% (excluded from our table as it doesn’t have a five-year history) to -15.8%, demonstrating the importance of fund selection. Of those that do have the requisite history, Wellington Enduring Assets is the top performer over three years, delivering 26.2%. Lipper classes it as an Equity Global vehicle, rather than the more specific Equity Theme—Infrastructure classification within which most of the funds fall. This is because it invests in “companies globally that own long-lived physical assets such as those in utility, transportation, energy, real estate and industrial sectors and which are believed to possess a competitive advantage”. So, despite its sector, it’s a more diversified play than its peers.
It’s also benchmarked to the MSCI AC World index, which it has underperformed from 2019, as indicated by the Lipper Leader score of 1, albeit with the highest score of 5 for capital preservation, reflecting more conservative nature of its portfolio. You should therefore expect it to behave more like a conventional global equity fund than its sector peers. The second-placed VT Gravis UK Infrastructure Income fund is a fund of funds and is purer-play infra. That said, it tends to have a 10-20% fixed income exposure, and Lipper classifies it as Mixed Asset GBP Aggressive rather than as an equity vehicle.
Table 1: Top-Performing Infrastructure Funds Over Three Years (with a minimum five-year history)
All data as of November 30, 2021; Calculations in GBP
Source: Refinitiv Lipper
This article was originally published in Moneyfacts, p13
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