Each week we highlight one of the funds from the Wealth 150 as our Fund in Focus. The Wealth 150 represents what we believe to be the best funds across the major sectors. This week Heather Ferguson, Investment Analyst, looks at the First State Global Listed Infrastructure Fund.

The Organisation for Economic Co-operation and Development (OECD) estimates that over $50 trillion will need to be spent by 2030 to meet the world’s infrastructure needs.

In developed markets, a key driver of increasing infrastructure requirements is the growing concentration of people living in urban areas. Many governments cut back on infrastructure spending following the financial crisis, adopting a ‘make-do and mend’ attitude. While this had the desired effect of reducing capital expenditure at the time, a significant amount of spending is now required moving forwards. In developing nations such as India, the infrastructure requirement is almost limitless and includes airports, sea ports, rail lines and thousands of miles of road.

To benefit from this trend, Andrew Greenup and Peter Meany invest in a wide range of global listed infrastructure companies, including those operating toll roads, airports, ports, railroads, utilities, pipelines, energy storage, mobile towers and satellites. The sectors all benefit from high barriers to entry – it is not easy to build a new airport to rival Heathrow or an alternative to the Dartford Crossing – and although their prices are often regulated, tariffs and charges often rise in line with inflation, providing a reliable income stream.

However, the share prices of infrastructure companies have different sensitivities to the economic cycle and interest rates. Utility or pipeline companies for example tend to be vulnerable to interest rate hikes as they are generally popular with ‘income’ investors. When interest rates rise, investors demand a higher yield from their investments, driving the share price down. Conversely, ‘growth’ sectors such as ports or railroads tend to benefit from an improved economic outlook. During periods of prosperity, people are more likely to travel and the volume of goods transported rises alongside increased consumption.

As the managers expect US interest rates to rise by the end of the year, exposure to utilities and pipelines has been reduced. They are instead favouring telecom towers, freight rail and toll road companies as they feel investors have underestimated their growth potential and pricing power.

Performance over the past five years has been broadly in line with the index with the fund returning 61.4% compared with 61%* for the FSTE Global Core Infrastructure 50/50 Index, although past performance is not a guide to the future. In recent months, the sector has been negatively affected by concerns over slowing growth in China and lower oil prices. Positive stock selection from the managers meant the fund fell to a lesser degree than the index, although there are no guarantees this will continue.

Performance of the First State Global Listed Infrastructure Fund over the past 5 years

Source: Lipper IM, correct at 01/09/2015

Past performance is not a guide to the future. *Source: Lipper IM 01/09/15.

Our verdict

The fund has typically held up well during times of falling prices due to the ‘steady’ characteristics of infrastructure such as reliable cash flows, inflation protection, and the necessity of their services. The fund currently yields 2.9% (variable and not guaranteed) which in a low growth, low interest rate environment is attractive to investors able to accept the risks associated with this specialist area. The fund is relatively concentrated with 44 holdings and can invest in smaller companies, both of which add risk.

Peter Meany has over a decade’s experience as an infrastructure and utilities analyst, and has managed the fund since launch in October 2007. He is supported by a well-resourced and experienced team at First State and adopts a tried and tested approach. We believe this adventurous fund makes an excellent choice to diversify a portfolio and it remains on the Wealth 150 list of our favourite funds across the major sectors.

Please note the fund’s charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.