Put money in schools and roads to boost economy

| September 8, 2012 | 0 Comments

By
Sam Dunn

15:50 EST, 7 September 2012


|

02:47 EST, 8 September 2012

The pitch will sound familiar: ‘We’ll invest in schools, hospitals, roads, rail networks, prisons . . . ’ But this is no political speech from MPs on the make. Instead, it’s the mantra of those who manage ‘infrastructure’ funds.

These take money from ordinary investors and plough it into big public projects, many of which are Government-backed private finance initiatives or public/private partnerships.

The appeal is clear. With a steady stream of cash flowing out of these operations, investors can look to regular income and yields of between 5 per cent and 6 per cent – a cut above returns on the high street.

Infrastructure on track

So while capital growth may be slow
since most of these giant projects are already completed, the income
stream should more than make up for it. And amid today’s sluggish
economy, demand among investors desperate for returns is rising,
advisers say.

Jason
Hollands at independent financial adviser Bestinvest says up-and-running
‘physical’ infrastructure such as schools, prisons and hospitals are a
major attraction for investors.

The
bottom line, he stresses, is a steady and stable cash-flow – ideal for
investors seeking reliable returns. In many cases, the projects were
also set up with contracts offering some protection against inflation,
Hollands adds.

Backing
Britain’s infrastructure has long been a political rallying call but
last November, as part of his growth strategy, Chancellor George Osborne
unveiled a plan to pump up to £250bn into transport, telecoms and power
networks.

Nicknamed the
‘National Infrastructure’ plan, he identified nearly 500 projects in
need of cash amid hopes UK pension funds would also help out to the tune
of £20bn.

However,
little has since moved on, prompting investing scouting opportunities to
focus on existing projects. So how does your money actually end up
paying for a new court house or supplying concrete for a prison
extension?

In a
nutshell, you buy shares in the infrastructure fund – an investment
trust – which directly owns the existing physical assets.

For
example, it might have bought a hospital building, a string of schools
across a particular region or series of public sector office blocks.

In this case, cash is generated from rents paid by tenants.

Alternatively,
and this is especially popular where the trust invests overseas, the
cash comes from fees paid by users of a directly-owned private toll road
or airport.

However,
there are only a handful of trusts to choose from, advisers say. They
include HICL Infrastructure, which has spread investors’ cash across a
portfolio of 73 projects including Oxford John Radcliffe and Romford
hospitals, the M80 motorway in Scotland and, overseas, the Dutch High
Speed rail link.

Its
yield is currently 5.5 per cent. The fund is recommended by Mark Dampier
at advisers Hargreaves Lansdown and Tim Cockerill at wealth manager
Rowan Dartington.

Other
popular infrastructure investment trusts recommended by advisers include
John Laing Infrastructure and International Public Partnerships. They
both offer yields in excess of 5 per cent.

There
are downsides to watch out for. Because they’re investment trusts –
essentially companies whose share price reflects the value of an
underlying basket of assets – there are only a set number of shares.
This limits supply, and their current popularity has pushed up their
share price, making them expensive to buy.

Shares in infrastructure funds can be acquired directly from fund managers or advisers.

Fund
managers including First State, JP Morgan and CF Macquarie offer a
retail ‘infrastructure’ fund. According to funds analyst Morningstar,
the best performing of these over the past three years is First State.
For every £1,000 invested in August 2009, you’d now have £1,320.

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