Assets that can deliver decent returns, especially those above inflation, are all the more appealing to advisers’ clients in a low interest rate environment, where rising inflation is beginning to bite.
But there are headwinds for investors to be aware of when allocating to listed infrastructure, as Gavin Haynes, managing director at Whitechurch Securities, highlights.
“In terms of drawbacks, if we do start to see the interest rate cycle turning this could prove to be a detractor for areas of infrastructure shares that behave like bond proxies. Regulated utilities could be particularly under pressure and highly geared projects could be exposed to higher borrowing costs,” he cautions.
“Ironically the increased focus on infrastructure spending may act as a headwind for long-term investors in listed infrastructure. The euphoria to invest in the sector could lead to short-term demand seeing valuations reaching unsustainable levels.”
Mr Haynes adds that a sharp upturn in infrastructure fuelled growth could lead to interest rates rising quicker than expected, dragging on interest rate sensitive areas.
He acknowledges though that a key advantage of listed infrastructure is its accessibility and the fact it provides more liquidity and transparency than investing directly in infrastructure projects.
But Mr Hollands believes infrastructure equities is a largely interesting space, particularly for long-term growth investors.
“Infrastructure equity funds are also more accessible for retail investors than the investment companies that back operational projects as all of these trade at very high premiums to their net asset value and therefore participation in these is really best achieved when they periodically raise new funds rather than buying the shares on the secondary market,” he advises.
He recommends using a fund such as the Lazard Global Listed Infrastructure Equity fund, as it targets companies focused on monopolistic projects and with inflation-linked revenues.
When it comes to selecting listed or unlisted infrastructure, advisers and their clients should always be considering their long-term requirements.
But Mr Langley suggests unlisted and listed infrastructure assets work as complementary asset classes, rather than substitutes.
He says: “The significant differences in the types of assets that you can gain exposure to through investing in the listed and unlisted markets leads to different sector and regional risk exposures offered by the two markets.
“We think that this can be underappreciated by investors, and that by allocating to both unlisted and listed infrastructure investors can optimise their risk and return exposures, and improve portfolio construction efficiency.”
He suggests: “In addition, the persistent market mispricing that can be seen in both markets (in different assets and at different times), provides a further rationale for holding an allocation to both unlisted and listed infrastructure.”
