Get growth and inflation-resilient income via First Sentier Global Listed Infrastructure

Last week US President Joe Biden set out plans to spend around $2tn (£1.44tn) on infrastructure in the US over the next 10 years. More generally, governments across the world are looking to improve weak economic fundamentals through infrastructure and green energy stimulus plans, which could benefit many global listed infrastructure companies. And when the coronavirus is more under control, there could also be a recovery in traffic and passenger volumes in sectors such as toll roads, airports and passenger rail.

As it is, money is already being spent on infrastructure. The ongoing repair and replacement of old energy transmission and distribution grids, and the accelerating build-out of renewables could represent a steady source of utility earnings growth over long timeframes.

Exposure to infrastructure can be useful in a portfolio because it can offer defensive, non-cyclical growth from a variety of areas. Examples include investment-driven earnings from electric, gas and water utilities' new transmission and distribution assets. Long-term economic and demographic trends should support a rise in demand for such services, which are needed regardless of the economic situation. This means they tend to be relatively immune to economic cycles and can exhibit defensive qualities in falling markets.

It can also offer exposure to clean, renewable energy which is replacing carbon-emitting, coal-fired electricity generation. And increasing equipment on mobile phone towers to cope with growing data usage on smartphones, and rising traffic volumes on toll roads due to urban congestion, also require infrastructure investment.

Options for getting exposure to infrastructure include First Sentier Global Listed Infrastructure Fund (GB00B24HK556). It aims for income and capital growth over the medium to long term by investing in the shares of companies involved with infrastructure. It had over half of its assets invested in the US at the end of February, so could benefit from any increase in infrastructure spending there. But it is also well-diversified across a number of other, mainly developed, markets so is not reliant on one area.

Unlike many listed broad infrastructure funds, First Sentier Global Listed Infrastructure is not focused on the UK, where it had only 4 per cent of its assets at the end of February. This makes it a particularly good diversifier for UK investors who have a heavy allocation to domestic assets and markets.

Another benefit is that its unit price reflects the value of its assets whereas nearly all broad infrastructure investment trusts are trading at premia to net asset value – in some cases double-digit ones. This fund also has a more reasonable ongoing charge than many of these, at 0.79 per cent.

First Sentier Global Listed Infrastructure is well-diversified across different infrastructure sectors that are not necessarily related to each other. These include electric, gas and water utilities, roads, railways, and oil and gas storage and transportation. This helps to mitigate the effects of political and regulatory intervention – two key risks when investing in infrastructure.

The fund’s managers also try to minimise these risks by favouring regions with stable regulatory environments, established legal processes and democratic political systems.

The fund has been run by experienced infrastructure investor Peter Meany since its launch in 2007. He and his team of seven are conservative investors who think that capital preservation is important for achieving long-term capital growth. They prefer to invest in real infrastructure assets with barriers to entry and pricing power.

“They believe that for infrastructure to deliver its full potential, other crucial requirements are management alignment, independent boards, appropriate gearing, transparent regulation and cultures that are working to sustain their licence to operate,” add analysts at research company FundCalibre.

Meany and his team like companies that dominate their area of the market so tend to be financially strong and can keep growing their earnings. They avoid companies making short-term gains that benefit their managements more than shareholders.

The fund's managers select securities via a seven-step process. They start by screening out securities with poor infrastructure characteristics ,and low yields and growth. After this, they do research on a potential investment’s management, asset quality, financial position and strategic direction, and the regulatory and overall competitive environment in which it operates. They also rank stocks according to their discounted cash flow valuations.

When broad global equity indices and funds are falling, this fund can fall less or even make positive returns, such as in 2018 and 2011. And the fund could be useful if inflation rises following governments’ economic stimuli as it aims to provide an inflation-protected income. It is helped by the fact that infrastructure providers' charges often rise in line with inflation or have some degree of inflation protection built in.

As an example, the fund’s managers recently added Republic Services (US:RSG), the second-largest waste company in the US, when its share price fell back. It owns landfill sites and has strong pricing power, with over half of its revenues linked to inflation. Its contracts typically feature automatic price increases of over 3 per cent a year. The fund’s managers say that Republic Services has stable, low-risk cash flows.

First Sentier Global Listed Infrastructure could be useful in an income portfolio. And due to global listed infrastructure’s growth potential, it could also benefit a long-term growth portfolio – especially its accumulation share class (GB00B6R3H571) which automatically reinvests dividends, further boosting growth.

This fund’s managers’ conservative approach means that it hasn't kept up when markets have risen quickly. It also lagged its benchmark, FTSE Global Core Infrastructure 50/50 index, in 2017, 2018 and slightly last year, so its cumulative returns do not look good against this.

Despite its managers’ conservative approach and the defensive nature of some of the assets it invests in, this fund is not low-risk. First Sentier Global Listed Infrastructure has historically been about as volatile as the average global equity fund, according to analysts at FundCalibre, and can experience falls such as in 2020 when it went down over 6 per cent. Because the fund invests in the shares of infrastructure companies, it can be more correlated to equity market returns than funds that invest directly in infrastructure assets and projects.

However, the fund has shown that it can beat its benchmark, and provides a different return pattern to broad global equity indices and funds. It could also do well in the years ahead as infrastructure spending increases and the world emerges from the pandemic. And if you have a high enough risk appetite and long enough time horizon to invest in equities, you should be able to ride out any periods of volatility.

So if you want exposure to the potential infrastructure growth over the long term and or a more inflation resilient income, First Sentier Global Listed Infrastructure still looks like a good option. Buy.