Infrastructure is what society is built around. It covers the facilities and systems that serve a country, city, or other area, and encompasses the services necessary for its economy, households and firms to function. It includes roads, railways, bridges, tunnels, water supply, sewers, electrical grids, telecommunications and in the digital age Internet connectivity and broadband access.
According to the McKinsey Global Institute, worldwide investment in infrastructure needs to average USD3.3 trillion a year to support global economic growth aspirations and provide citizens with essential services. According to McKinsey, in terms of sector areas going forward, USD5.1 trillion will need to be invested in rail, USD7.5 trillion in water and USD11.4 trillion in roads between 2016 and 2030 in order to keep pace with projected growth.
The primary private investors in the infrastructure sector are pension funds, life insurance companies, sovereign wealth funds and other funds acting on behalf of these investors. Private investors typically work with governments by contributing funds to build and manage infrastructure. There are several ways in which this can happen. Infrastructure can be built by governments and subsequently privatised, or built from the ground up using private money, or developed through hybrid arrangements such as public-private partnerships and private finance initiatives.
Long term play
The infrastructure sector is attractive to investors who are looking for long-term investments with a reliable return profile. It can provide a steady income stream lasting years into the future, perhaps through track access charges, rail fares or through utility bills. In addition to funding, private investors can bring development experience and management expertise to help improve the performance of their asset and the benefit it brings to users and society.
As society develops, new pieces of infrastructure will need to be added, such as charging infrastructure for new electric cars coming onto the road (and all the new infrastructure needed to create the electricity for the batteries for those cars) and a network of Hydrogen refuelling station for heavy and freight transportation, as the transportation industry moves in line with the transition from carbon-based fuels.
The team behind the IFSL Marlborough Global Essential Infrastructure hopes to take advantage of this sector. Led by Tim Humphreys head of Marlborough’s Global Essential Infrastructure division, the fund aims to provide capital growth: to increase the value of your investment; as well as to provide income: money paid out from an investment as dividends from shares, over a minimum of five years.
Humphreys, an engineer by training, has been in fund management since 1996 focusing on infrastructure stocks. Previously at Rothschild, Insight Investment, RARA and AMP Brookfield, he has managed the fund since the fund’s launch in September 2022 and is joined by Jonathan Reyes, Natasha Thomas and Paul Johnston who have been in situ for the same period.
It’s not a huge fund, according to the fund manager as at 3rd April, the fund was GBP4.3m and is comprised of between 25 and 45 “high-quality publicly listed companies providing essential infrastructure facilities around the globe.” As at beginning of April the fund had 28 stocks.
Inflation hedge
The fund was launched into a period where inflation was at its highest point for decades and has strong embedded inflation protection because of the nature of the companies held, an example of which are utility companies where regulators allow the sector to increase their profits in line with inflation. Humphreys said: “Our portfolio is extremely well-positioned to deal with higher inflation. Around 95% of the fund is invested in companies that have either explicit or highly implicit inflation protection.”
The fund follows trends that are coming to the fore, investing in companies that are benefiting from long-term secular growth trends, such as the global transition from fossil fuels to zero-carbon energy and given the nature of infrastructure, offers a reliability of earnings and cash flows that are highly attractive in the current environment.
Infrastructure is a fairly safe bet – there is a lot of it, and if the population keeps urbanising and growing (which it should do) there will be a need for a lot more of it. The companies the fund holds are typically in regulated industries with long-term contracts and have a track record of stable cash flows through whichever stage the economic cycle is in – it doesn’t matter if it’s a recession or a boom, we’re all going to need sewage taken away and treated.
The fund is benchmarked against the IA Infrastructure index and is in a sector that will develop with society – estimates suggest that one dollar of infrastructure investment can raise GDP by 20 cents over the long term, with such economic results emerging from shortened travel times, increased access to power and the digital economy.
Early days
It is early days for the fund, so it’s hard to say how the team will perform – basically you are buying potential, not historic returns. Over six months the fund has returned 0.32% and over three months has offered -3.16%.
As it is a shiny new penny, the fund charges are not onerous with an initial charge 0.00%, no exit charge, no performance fees and ongoing charges of 0.60%. However, platforms will charge investors their standard management and dealing fees, dependent on account held.
The fund is a UK based, sterling-denominated open-ended investment company.
Marlborough Global Essential Infrastructure Fund top five holdings:
Company | Weighting | Country | Sector |
NextEra Energy Inc NYSE:NEE | 6.2% | United States | Utilities |
Cellnex Telecom SA [BMAD:CLNX] | 6.0% | Spain | Telecoms |
Transurban Group [ASX:TCL] | 5.9% | Australia | Industrials |
American Tower Corporation NYSE:AMT | 5.4% | United States | Real Estate |
Ferrovial SA [BMAD:FER] | 5.0% | Spain | Industrials |
Data from 3rd April
Our view on the Marlborough Global Essential Infrastructure Fund
The IFSL Marlborough Global Essential Infrastructure fund is very new – it hasn’t had its first birthday yet – and that comes with its own risks. However, as we’ve seen in the UK, infrastructure investment is key to economic growth (and the UK’s inability to invest in the area sensibly is having a drag on the county’s prospects) and continual stock market underperformance and volatility is playing into this fund’s hands. However, infrastructure (case in point HS2 in the UK) takes a long time to develop and can be held up by various factors, not least the government. In some cases key infrastructure developments are decades in the planning and might never see the light as various administrations have differing priorities and objectives. As such investment in this fund should be seen as long-term with a minimum investment period of five years.