Emma Wall: Hello and welcome to the Morningstar series, Ask the Expert. I'm Emma Wall and here with me today to talk about infrastructure investment is Morningstar analyst, Szymon Idzikowski.
Hello, Szymon.
Szymon Idzikowski: Hi, Emma.
Wall: So I thought we would talk about infrastructure investment today, because infrastructure is in the news a lot. Network Rail has just announced £38 billion five-year plan to revamp and refurb the Network Rail system. And also with the new pension system coming in, there is some talk of retirement savings plans including some infrastructure investment. So how exactly do investors go about getting exposure to the sector?
Idzikowski: Sure. There are two types of funds that would give you this exposure. And these are either direct funds or equity based funds. So, direct funds will invest in the real infrastructure projects. They will get involved maybe in construction of projects such as schools, hospitals or maybe servicing them. And this area can be accessed through investment trusts, given the more un-liquid nature of those projects.
The second type of funds, are equity based funds, which invest in sort of infrastructure related companies, but companies that are actually listed on the stock exchange and that own or service infrastructure. So a good example of the type of company would be National Grid (NG.), held by many infrastructure companies.
Wall: I mean you mentioned that the benefits of investing in these funds that invest in infrastructure equities are that they are more liquid. However, a lot of people look to infrastructure to provide diversification with their portfolio and they are just really another type of equity, where you probably have quite a lot of equities in your portfolio any way. So perhaps if we look at these investment trusts that invest in un-liquid infrastructure projects, what's one of the first trusts?
Idzikowski: Well, so one of the oldest and actually the largest infrastructure investment trust is HICL Infrastructure Trust (HICL), which invests in post completion projects. So, the shareholders are not actually exposed to the stage where the infrastructure is built and constructed, which although can generate more returns, also generate more risk. This fund has been launched in 2006 and since then until the end of February it returned over 8% annualised on NAV basis and a yield of about 5.5%.
Wall: So even though it's a sort of slightly lower risk strategy, because it's not going into the very beginning of these projects, it's still managing to deliver quite an attractive income there.
Idzikowski: Indeed.
Wall: And what's another trust?
Idzikowski: So another well-known trust is John Laing Infrastructure (JLIF). And what makes this fund different from its peers, is the fact that, it has first offer agreement with John Laing Group, which provides a nice pipeline of potential investment opportunities. So this fund actually invests also in post construction stage, very often backed up by government, invests most of its assets in the U.K., but also in America and Europe. And it also since its inception it probably returned over 6% annualised and it yielded about 5.5%.
Wall: You mentioned that John Laing was backed by the government. I mean, both of these trusts are very much domestically focused. Is that a concern the sort of the macro risks that the government is backing these investments?
Idzikowski: I actually think it's a positive. I mean, very often investors would invest in infrastructure because of reliability on cash flows. So if you have got government backing up those current cash flows, their reliability is even higher.
Wall: But it is, because these investments are unlisted, it is still only a niche holding for people, isn't it?
Idzikowski: Absolutely. It should always play sort of supporting player or a niche area within the broader portfolio.
Wall: Szymon, thank you very much.
Idzikowski: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
