Passive Infrastructure. Cheap shortcut or oxymoron?

What do investors generally think they are buying when they allocate to infrastructure? More often than not, they are hoping to gain exposure to assets and projects that are in some sense critical to the functioning of nations and economies, with consequently stable and long-term cash flows that can provide attractive returns.  Given the scale and complexity of these infrastructure assets, access points for retail investors are primarily focused on listed companies and funds. ‘Listed infrastructure’ aims to bridge the gap in terms of investment size and liquidity to allow smaller and shorter-term investors to enjoy the benefits of infrastructure. Having seen a range of actively managed global listed infrastructure funds come to the market in the past few years, the rising tide of passive investing is also now encroaching on infrastructure.

The recently launched Legal & General Global Infrastructure Index fund is one such example and it will seek to track the FTSE Global Core Infrastructure index. A key question is can such a strategy deliver the enhanced returns or lower volatility that you might expect from infrastructure? The answer so far is far from clear. On a five-year historic view, the FTSE Global Core Infrastructure Index has outperformed the FTSE All Share by about 1% on an annualised basis, with roughly 10% lower volatility. However, when compared with Foresight’s renewables and infrastructure investment company strategy (FP Foresight UK Infrastructure Income Fund) which launched in December, the index has underperformed by 8.9% (total return) and with roughly twice the volatility. The reason for the relative outperformance from Foresight’s strategy is that it is focused purely on listed infrastructure and renewables investment companies. These investment companies own the projects that are generating the long-dated and index-linked cash flows. Other ‘infrastructure’ companies that will be found within the FTSE index are ancillary to the sector (by providing goods or services) and can therefore be expected to correlate more closely to the wider equity markets.

Investors interested in exposure to infrastructure should therefore consider looking beyond passive strategies, and instead explore the value to be gained from an actively managed fund targeting exposure to real infrastructure and renewables projects.

To find out more about the FP Foresight UK Infrastructure Income Fund, including how to invest, click here.