Purpose and profit

Would you like to play your part in decarbonising the UK, building the infrastructure of the future, and getting new homes built – all while earning a financial return? If so, there is probably an investment company for you, if only you knew about it.

The investment case for many of these assets is very strong. We know, for example, that the UK faces huge pressure to shift away from fossil fuels and into renewable energy; renewables therefore represent a financial opportunity. Similarly, on housing, it’s painfully obvious that the UK is short of the property stock it needs – and that real estate can deliver really good results. On infrastructure, the UK is crying out for everything from new roads and railways to better digital networks; again, there’s a real opportunity for those who can fund such development.

However, it’s not just financial returns that these investments offer. In a world where growing numbers of investors report that they want their money to make a positive difference for society, these areas look enormously attractive. Funding the roll-out of wind and solar power, say, will feel much more comfortable for many investors than earning a return from traditional energy businesses.

Big investments for small investors

Still, investing directly in these areas is out of reach of most investors. The sums needed to finance these assets are simply too big. Also, they tend to be very long-term projects; investors need to be willing to tie up their cash for an extended period.

The answer is to invest through a collective fund – a vehicle that combines the resources of multiple investors under the control of a professional manager who has access to the kind of projects in which you’re interested. Importantly, the fund is able to commit to the long term, even if some of its investors come and go.

The government certainly recognises the opportunity here. For the past couple of years, it has been investigating ways to encourage funds to provide the capital needed for large-scale investment in the assets that the UK now needs to develop. It sees pension funds as a potentially vital source of capital, for example, alongside other collective funds.

One problem, however, is the mismatch between the needs of the fund’s investors and those of the projects in which the fund invests. If a fund puts money into a ten-year renewable energy development, say, it will struggle to get the cash back after only one year. If too many investors decide they need their money back at this point, that can cause real problems.

In the property sector in particular, we’ve seen this happen very frequently. Every couple of years, at times of stress, property fund managers have to tell investors they can’t have their money back for a period, because paying out to everyone demanding their money would mean having to sell off property quickly, often at unattractive prices.

The Treasury Committee, an influential group of MPs, discussed this problem last month. Investors are being put off funds that invest in illiquid assets by these lockdowns, MPs heard; they worry that if they put money into assets such as property, infrastructure and renewables, they won’t be able to get it back from the fund at a time of their choosing.

Why investment companies are different

Here’s the thing though. Not all funds operate in the same way. And crucially, investment companies don’t face this mismatch issue because of the way they’re structured. Investors buy and sell shares in the company, which gives them direct exposure to the value of the underlying assets. But their money isn’t going in and out of the fund itself, so they can trade their shares whenever they like, without having any impact on the fund manager’s ability to operate.

It's such an important point. Some MPs are pushing for investment companies to get a bit of support, given this advantage. In particular, they think investors shouldn’t have to pay stamp duty when buying investment company shares.

Such change would undoubtedly be welcome. The bigger story here, in the meantime, is that investment companies offer you an opportunity to put money into funds backing these in-demand areas without having to worry that you’ll be locked in.

There’s no shortage of choice. More than 20 investment companies offer exposure to renewable energy infrastructure, for example. Each of them offers its own take on the same principle – that decarbonisation provides financial opportunities as well satisfying the environmental imperative.

For investors keen to pursue purpose as well as performance, this is a potentially winning combination. In which case, the investment companies sector is a good place to start searching for the right fund.