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Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Infrastructure sector.

We last visited the Investment Association Infrastructure sector exactly a year ago. I fully admit it’s too niche for most retail investors, but before you tut over your morning kipper and turn the page, please read on, as major performance drivers for this sector—specifically, inflation and base rates—have wider (and hopefully instructive) lessons for investors. As a further incentive, if you are invested in a managed portfolio service or multi-asset fund, you may have exposure to such assets without realising it.

Infrastructure sector funds invest a minimum of 80% of their assets in companies that own, operate, or maintain infrastructure assets. Such assets cover the utilities, energy, transport, health, education, security, and communications industrial sectors—everything from hospitals, through airports to hydro-electric plants. While some infrastructure funds are direct owners of such businesses, funds in this sector get their exposure largely through investing in the shares of such businesses, or which themselves investing in specialist infrastructure funds, giving them advantage of greater liquidity. After all, it’s quicker and easier to sell shares in a wind farm than to sell the whole wind farm.

Given the macro-environment over the past few years, one of the positive aspects of infrastructure businesses is that many, such as for example toll road operators, have earnings streams that are inflation-linked. Useful to have, of course, when inflation is spiking.

But this has a negative flip side. Infrastructure businesses are, almost by default, capital intensive and so debt laden. Therefore, as rates base increased—as they did prodigiously in 2022—so did their debt-service costs, and that can take a big chunk out of their earnings. This rate sensitivity means that such businesses have “bond-like” characteristics, and bonds have not had a good run in this elevated rate environment.

Performance therefore dragged as rates spiked, with the sector returning -5.3% last year. That’s deterred interest in the sector, which has consequently suffered redemptions of £1.69bn over the 12 months to September 2024. However, it has been less volatile than many equity sectors, and with much less of a drawdown than other areas of the market that you may have intuitively expected to perform better. For example, the UK Index-Linked sector plummeted 36.06% in 2022, when the inflation protection aspect of these bonds was overwhelmed by the duration risk—the sensitivity of an asset to rates—as rates rose. The Infrastructure sector average was actually up by 2.23% in 2022.

Over the past couple of years, rising rates have taken a chunk out of earnings, and investors have understandably looked elsewhere for opportunities. If, as looks likely, the rates cycle has peaked, then infrastructure business will be in a more advantageous position, and performance could pick up. Other potential benefits are harder to call. For instance, this time last year we highlighted the boost to infra projects by the US Inflation Reduction Act’s spending plans. In election year, a change in leadership could obviously jeopardise this.

At the fund level, six out of the top ten funds made the table this time last year. However, as there are only 30 funds in the sector, less movement is to be expected than in a larger one. The WS Macquarie Global Infrastructure fund tops the table over three years, both then and now, and carriers a Lipper Consistent Return rating of 5—the highest—all of which bodes well. However, it should also be noted that it has underperformed its benchmark, the S&P Global Infrastructure TR (USD) over the period. So, over the period captured by the table, all funds in the sector have underperformed this major global index. A factor in this seems to be year-to-date performance, where the index has raced ahead. This, however, is something of a moot point, as there is no UK registered for sale fund equivalent of this index.

Table 1: Top-Performing Infrastructure Funds Over Three Years (with a minimum five-year history)

(Click on image to enlarge)

All data as of September 30, 2024; Calculations in GBP

Source: LSEG Lipper

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