Structurally solid

Suddenly, infrastructure assets and the funds that invest in them appear not to look so alluring. In recent years, closed-ended infrastructure funds have been a hugely popular choice with investors and advisers – their generous yields in this low-interest rate environment have been one attraction, but the funds were also perceived as relatively low-risk, given the implicit Government guarantees underpinning the private finance initiative (PFI) assets that are often a big part of their portfolios.

In the wake of the Carillion collapse, however, we’ve seen a sell-off across much of the infrastructure sector. In part, that was because funds such as HICL Infrastructure, International Public Partnerships and John Laing Infrastructure have exposures to Carillion, largely through facilities management contracts that will now have to be unwound; though small, these exposures have knocked confidence in what has previously been a very stable sector.

It’s also the case that some analysts believe the fall-out from the Carillion affair will generate continuing headwinds for the infrastructure sector. “The events of the last four months mean that a reappraisal of the asset class is required,” argued the investment companies analyst team at Winterflood Investment Trusts in a note published last week. “Following a number of years of increasing demand for infrastructure assets, rising prices and falling return expectations mean we see potential for this to reverse.” Winterflood’s argument is that the Labour Party’s public repudiation of PFI and increasing scepticism about its value – the National Audit Office, for example, has criticised the economics of some projects – could see these arrangements fall from favour. In which case, the investible asset class for many infrastructure funds will shrink steadily.

All of these arguments are perfectly valid, but it would be wrong to decide that infrastructure suddenly no longer has a future as an asset class. For one thing, it has served investors well and continues to do so; notwithstanding the volatility of recent days, these investment companies have delivered stable returns and still offer the sort of dividend payments of which bond fund investors – never mind bank and building account savers – can only dream.

Moreover, it is not credible to argue that the UK government, whichever party is in power, is now going to turn its back on PFI completely, even if government bond markets continue to offer a cheap source of funding. There will continue to be many projects for which alternative models of funding are appropriate. In any case, UK PFI assets are not the only investments that the infrastructure sector holds.

The travails of the infrastructure funds in the wake of Carillion do represent something of a wake-up call. Investors and advisers who assumed these funds offer a risk profile broadly analogous to cash or gilts but with superior income potential will not be so complacent in the future. Sector watchers will think more carefully about a broader range of potential risk factors. And valuations, with shares in some funds having traded at substantial premiums to the underlying assets, may be more restrained.

Nevertheless, infrastructure funds are here to stay. They will continue to represent an attractive option for many investors – particularly those looking to generate sustainable income from their portfolios. And they will continue to invest in a broad range of projects, including PFI contracts, but not exclusively.

One final thought. The events of recent days once again underline the attractions of investment companies when it comes to illiquid assets. The Carillion collapse is the sort of event that can spark panic amongst investors, causing a rush for the exit doors. In an open-ended fund, that may be disastrous, with the manager forced to offload assets at fire-sale prices to meet redemptions. An investment company manager running a fixed pool of assets, by contrast, does not have this problem.