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Infrastructure funds can help you to build wealth

Driving force: if you decide to invest money in infrastructure - around 5% of your portfolio is the suggested portion

These are alarming days for investors, most of whom now need an antidote to the chaos caused by the most high-profile mini-budget announcements. Focusing on your other metrics can be a way to reduce anxiety and reconfigure your portfolio.

As part of his growth stimulus plan – which we are expected to hear more about at the Conservative Party Conference next week – Chancellor Kwasi Kwarteng pledges to streamline planning for roads and other categories of infrastructure, such as energy projects of various types, including hydrogen, nuclear, onshore wind, energy efficiency and energy security.

Building and upgrading such systems should support the recovery in the UK and around the world. Labor also sees more investment in infrastructure as key to economic success: the Organization for Economic Co-operation and Development estimates that £5 trillion is needed worldwide every year until 2030.

Driving force: if you decide to invest money in infrastructure - around 5% of your portfolio is the suggested portion

Driving force: if you decide to invest money in infrastructure – around 5% of your portfolio is the suggested portion

There is a new urgency as war rages in Ukraine. “What the world needs now is energy efficiency,” says Will Riley of the Guinness Global Energy fund.

This week’s sabotage of gas pipelines between Europe and Russia will reinforce calls for more energy security.

Stephen Daniels of ARC Time UK Infrastructure Income Fund, which holds stakes in major infrastructure funds, comments: “Energy efficiency is high on the to-do list in many countries.

If you decide to invest money in infrastructure – around 5% of your portfolio is the suggested portion – there’s a plus: the inspiring nature of technologies.

For example, an old point may not be a suitable plot for new housing. But the methane produced from decaying waste is a greenhouse gas and can be used to generate electricity.

Daniels points out that private investors were once excluded from the possibility of supporting such technologies, as well as projects requiring huge capital such as roads and railways.

Infrastructure has historically been viewed as a sector uncorrelated to equity markets, a key consideration for investors re-evaluating their options.

There is also the possibility of an assured income. The contracts under which many public sector projects operate provide long-term income linked to inflation, although the mini-budget has had a negative impact on these.

Infrastructure investment trusts use a discount rate formula to estimate the value of future cash flows. But the fall in the price of gilts, which has made a rise in interest rates more likely, threatens to push up bank rates.

A higher discount rate makes any source of income less attractive. The typical discount rate is 6-7% and an increase of 1% would typically cause the net asset value to decrease by around 6%.

These concerns have affected the share price of the trusts. Shares of the HICL Infrastructure trust, which owns stakes in the A63 motorway in France and Affinity Water in the UK, have fallen 14% over the past week.

Discount rates should come under scrutiny, as should the drafting of planning policies and their implementation, as James Dawes, chief financial officer of 3i Infrastructure Trust, explains.

He says: ‘The mini-budget’s decision to roll back corporate tax hikes will benefit businesses. But the devil is in the detail of the structure of the planning reforms.

Kwarteng may have promised dozens of UK programs would be ‘speeded up’, but those promises have not always been kept.

There are also the problems posed by soaring construction and material costs – and the likelihood that interest rates will rise faster than previously thought.

Dawes comments, “Most of our companies have long term fixed rate financing. But soaring borrowing costs pose a risk for financing new projects.

The trust, which has generated a return of 76% over the past three years – twice the industry average – is, for now, focused on the UK and Europe.

It owns Infinis, a British group that generates electricity from landfills, and ESVAGT, the Danish group whose ships support the offshore wind, oil and gas industries. Thanks to its track record, 3i Infrastructure’s stock price was at a premium of more than 20% to the value of its net assets earlier this year.

This has now been reduced to a 3% rebate, in line with the trend in the industry, following the mini-budget, turning trusts into a workable proposition for investors like me who don’t like paying too much.

For example, the premium on the BBGI Global Infrastructure trust fell to 3% despite its inflation-protected income from its public-private partnerships in health and transport. When you cross the Golden Ears Bridge in Vancouver, Canada, you are on a BBGI Infrastructure asset.

Navigating the coming weeks is going to be difficult, with focusing on the long term being even more difficult than usual.

One thing is almost certain: the world’s population is growing and will need more infrastructure in all its forms: roads, railways, health facilities and electricity.

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