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Clean power for your portfolio

Created:
18 June 2008
Written by:
Moira O'Neill

Investing in utilities used to be boring. Gas, electricity and water companies had predictable revenues, but didn't stir the investor's soul. However, rebranded as infrastructure, particularly environmental infrastructure, they have become a big 'alternative' investment theme.

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In today's turbulent markets, many fund managers are looking to infrastructure as something of a safe haven. For example, Neil Hermon, manager of the Henderson Smaller Companies Investment Trust, which has a UK focus, says: "In times of economic uncertainty, investors will be prepared to pay up for companies that display earnings resilience. I believe that companies that build and provide services into the infrastructure market have this resilience."

He points out that the government has made a commitment to areas such as education, transport and health that will require the investment of tens of billions of pounds. Additionally, the Olympics will provide a short-term boost to demand. "Businesses that provide services into these areas, such as equity participation, construction and maintenance are poised to do well," he says.

But the environmental subset of the asset class is attracting even more attention. Clare Brooks, director of Carbon International, explains: "Infrastructure has always been a safe asset class. Environmental infrastructure is arguably even safer because it is backed by legislative and regulatory drivers. In Spain, for example, the legislative environment is particularly supportive." Here in the UK, the government has committed to reduce greenhouse gas emissions by 12.5 per cent on 1990 levels by 2012 and is also under pressure from EU carbon dioxide targets.

"Inevitably there are risks," says Bruce Jenkyn-Jones, director of Impax Asset Management. "We do need governments to remain committed to environmental policy. But this looks likely. Even in the US, we're likely to get an administration that is committed to environmental policy."

However, Matthew Phillips, of BDO Stoy Hayward Investment Management, sounds a note of caution. "Clean energy and infrastructure is one of those investment themes that very few in the private client space were talking about two years ago," he says. "However, some pension funds have been looking at these areas for at least five years and in some cases as far back as 10.

"In some ways, this could be the start of a speculative bubble in green energy. Many of these technologies as yet are not commercially viable, and certainly not without government subsidy. What we could be pricing in here is expectation rather than actuals."

He agrees that this does look like an investment opportunity for the longer term, "however, perhaps the best time to invest is once all the froth has gone".

So how can investors get exposure?

John Newlands, head of investment trust research at Brewin Dolphin, is drawing his clients' attention to the various investment trusts investing in infrastructure.

He explains: "The development of infrastructure trusts stems from the British government's private finance initiative (PFI). What this boils down to in plain terms is that if the government wishes to provide a new hospital, police training college or the like, instead of fronting up with cash from the public purse, via a gilts issue or whatever, it invites the private sector to quote for the job, typically on 25-year terms.

"It helps that PFI projects are being launched to fund, for example, Dutch tramways, Australian toll roads and, looking ahead, bridges and freeways in certain US states.

"In summary, the beauty of infrastructure trusts for private investors, is that they can obtain a worthwhile - and potentially growing - income yield from a diversified managed fund, the core holdings in which are founded primarily upon government and local government contracts. That is a pretty attractive proposition in these uncertain times."

The first infrastructure trust to launch on the London Stock Exchange in 2006 was HSBC Infrastructure Company which is focusing on social infrastructure projects, toll roads, bridges and tunnels, airports, ports, utilities and transmission grids and renewables.

Mick Gilligan, director of fund research at Killik & Co likes Utilico Investment Trust, which holds a portfolio of global utility stocks including Ifratil (the New Zealand based infrastructure investment company), Flughafen Wien (the operator of Vienna International Airport) and Cegedel (the Luxembourg electricity company). Utilico also holds a 20 per cent stake in its sister trust, Utilico Emerging Markets.

For a global play on environmental infrastructure consider Impax Environmental Markets investment trust, which invests around the world in the cleaner and more efficient delivery of basic services of energy, water and waste. Fund manager Bruce Jenkyn-Jones says: "Global infrastructure spend is to rise by nearly 50 per cent each decade, fuelled by population growth and globalisation, according to OECD estimates. Historic underinvestment means catch-up is necessary."

The Triodos Renewable Energy Fund offers an environmental infrastructure play closer to home. Fund manager James Vaccaro says: "We invest in the UK in projects that take advantage of bad weather. An Ernst & Young study identifies the UK as having the best potential for wind energy in Europe."

Fans of low-cost exchange-traded funds can get access to potential infrastructure growth via the iShares FTSE/Macquarie Global Infrastructure 100, which gives you a broad-based exposure to the shares of the world's leading infrastructure companies, including transport and utility stocks.

MORE ON GREEN FUNDS

You can search for data on hundreds of funds using our funds data tool.

For more on green investing, see Reducing the fuel burden, Investment guide to green investing and Home is where the heat is.

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