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Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Infrastructure sector.
Funds in the infrastructure sector invest at least 80% of their assets in companies involved in the ownership, operation, or maintenance of infrastructure assets. These span the utilities, energy, transport, health, education, security, and communications industrial sectors—covering everything from hospitals to hydroelectric. While some infrastructure funds are direct owners of such businesses—owning outright, for instance, wind farms—these funds have their exposure largely through investing in the shares of such businesses, or themselves investing in specialist infrastructure funds. That has the advantage of greater liquidity (it being easier to sell shares in a wind farm than to sell the wind farm itself).Infrastructure is a bit niche for most retail investors, but it brings together some very relevant trends at the moment—both positive and negative.First, the positive: global infrastructure is old and in need of updating in much of the developed world, and needs building out in many developing countries. That’s especially true given the requirement to transition to a sustainable economy. This is being funded through such initiatives as the Inflation Reduction Act in the United States. The Act commits $500bn in new spending and tax breaks that aim to boost green technology and clean energy. Much of this will go to infrastructure projects. In the European Union, the European Green Deal is a package of policy initiatives with the ultimate goal of reaching climate neutrality by 2050. Again, infrastructure spending is an important element of this transition. Indeed, of the 29 funds in the sector, one-third are considered by Lipper to have responsible investment attributes.Another positive and relevant aspect of infrastructure in the current environment is that many infrastructure assets, such as toll roads and utilities, have fees that are linked to inflation, thus providing an income stream that is (to some extent at least) inflation protected.This brings us to the negative aspect of infrastructure in this environment. These businesses are, by their very nature, capital intensive and so they tend to be heavily debt-laden. So as rates go up, so do their debt-service costs, and that can take a big chunk out of their earnings. This rate sensitivity means that such businesses have “bond-like” characteristics, and bonds have not had a good run in this elevated rate environment.The result can be seen from average sector returns over the three months to the end of September (-5.72%) and 12 months (-9.64%). Given the poor performance of renewable energy funds over the period, it’s no surprise that ethical funds have fared worse (-7.48% to conventional funds, -4.29% over three months, and -11.38% to -8.22% over 12 months). Conversely, they have outperformed significantly over three years, by 12.7% to 7.43% (the total average being 9.59%).Scanning for differences between the top and bottom performers over three years, the latter seem to be getting more exposure through fund structures, but that’s no more than an impression, and there’s likely no single reason for the underperformance. The drag of additional fund charges may well be a contributing factor, although there doesn’t seem to be a significant relationship between charges and performance over the period, and the top-performing fund—WS Macquarie Global Infrastructure Securities—has the second-highest total expense ratio of the sector.So, the sector is subject to forces pulling in different directions: on the negative side, it’s bleeding capital to service its debts, and will continue to do so as long as rates stay elevated. With “higher for longer” gaining more traction as a consensus view, that’s bad news. However, on the positive side, especially given inflation linkages, much of that cost can be passed onto customers. And there’s also the positive for sustainable infrastructure of all that state-supplied investment coming their way.
Table 1: Top-Performing Infrastructure Funds Over Three Years (with a minimum five-year history) All data as of September 30, 2023; Calculations in GBPSource: LSEG LipperMore By This Author:STOXX 600 Earnings Outlook 23Q3 – Tuesday, Nov. 28European Fund Flow Trends Report, October 2023The Bond Market Is Making Its Second Mistake Of The Year