An M&G guide to investing in listed infrastructure

19/07/2019

Modern life hinges on the functioning of a vast network of systems and structures that enables us to live and work as we do. Building and maintaining these important assets can cost a lot, but the rewards for long-sighted investors in successful assets can be great.

This guide explains our approach to investing in listed infrastructure, and why we believe that this asset class can bring valuable benefits to long-term investors.

Glossary

For explanations of the investment terms used throughout this article.

View the glossary

What is infrastructure?

Infrastructure broadly refers to assets associated with the provision of essential services for the safe and prosperous functioning of global society. These are physical assets on which we all rely every day – from the utilities that provide our power and water, to the toll roads and railways on which we travel.

These types of businesses typically enjoy the following characteristics:

  • Long-life assets governed by long-term contracts
  • Inflation-linked revenues
  • Stable and growing cashflows

The relatively predictable nature of these cashflows is highly suited to long-term investors who are looking for a reliable and growing income stream, with their capital value supported by physical assets.

What is listed infrastructure?

Investing in infrastructure has traditionally only been possible for institutional investors – such as pension schemes and sovereign wealth funds – by way of large private investments, where capital is locked away for long periods of time.

However, the asset class is increasingly accessible to individual investors, not least through the shares of infrastructure companies listed on the stock market. This is what we mean by listed infrastructure.

Not only can you invest in listed infrastructure with much smaller amounts than that required to invest in private assets, but listed investments typically offer significantly greater liquidity because the shares of larger companies are traded regularly and so can usually be bought or sold quickly and easily. Listed infrastructure can also offer investors a high degree of diversification because each company will typically generate income from a number of different assets.

You can gain access to a broad range of listed infrastructure companies by investing in a fund, which combines holdings in a number of companies into a single investment.

When funds generate income from the companies in which they invest, it can be paid out to investors on a regular basis if they choose to own income shares. Alternatively, income can be reinvested to generate further income and capital growth, if the investments perform well.

How does M&G look at listed infrastructure?

We focus on companies that own and control physical infrastructure assets. Crucially, we believe the right physical assets provide a strategic barrier to entry, protecting the income streams and underlying value of the investment. We therefore choose not to invest in service providers, such as telecommunications operators or companies involved in the engineering and construction of infrastructure.

The physical assets that we focus on typically have long lives – often 50 years or more, in fact. As such, we have to analyse a variety of factors to ensure, as best we can, that the assets remain utilised and relevant for the entirety of their lifespans.

An important part of this is the assessment of environmental, social and governance (ESG) considerations, which is integral to our investment process. Incorporating ESG ensures that the assets and businesses in which we invest are sustainable and commercially viable over the long term. Coal-fired and nuclear power exposure is strictly limited on this basis.

Physical infrastructure is rapidly expanding beyond the traditional realm of utilities, energy pipelines and transport – which we refer to as ‘economic’ infrastructure. To capture the full breadth of the asset class, and the qualities it has to offer, we enhance the traditional definition of infrastructure and invest across three distinct categories of investible companies.

 

E582F357924B47DD9457C0C51AE25D1F 

Economic and social infrastructure will both typically offer steady income streams that should be resilient to fluctuations in the wider economy. ‘Evolving’ infrastructure adds an entirely unique profile with its higher growth potential, injecting a new dimension to an asset class with stability at its core. We believe that investing across all three, each with their own range of assets, can be an effective way to diversify investment risk and opportunities.

Across these three infrastructure classes, we look for companies that will have the potential to pay growing dividends to their shareholders over time. This is central to our investment philosophy and stems from the belief that growing dividends are an important driver of long-term share price performance.

Are listed infrastructure funds right for me?

Listed infrastructure funds will typically be suited to investors who are targeting:

  • A rising income stream
  • Potential for capital growth over the long term
  • Diversification within their portfolio of investments

Each fund will have its own characteristics and a distinct risk and return profile, so you should make sure that its specific objective resonates with your own personal investment goals.

The suitability of any investment will always depend on your circumstances and attitude towards risk and return. If you’re at all unsure, please speak to a financial adviser.

Please keep in mind that the value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.