Infrastructure is a defensive type of holding that is well-placed to protect its dividends, writes Nick Sudbury.
Open-ended infrastructure funds like OEICs and unit trusts provide exposure to a global portfolio of listed companies that operate in the sector. The underlying businesses normally generate stable cash flows and steady returns, yet they have still been affected by the market sell-off, especially where they rely on economically sensitive revenues.
It is difficult to assess the performance of infrastructure funds as a whole as they are included within the wider global equity peer group, but it is useful to look at how a couple of well-regarded constituents have fared. The two in question are First State Global Listed Infrastructure and Legg Mason IF RARE Global Infrastructure Income.
Different types of exposures
The First State fund was launched in October 2007. It has £1.6bn in assets under management (AUM) and benefits from an experienced team that invests internationally in different sorts of infrastructure companies.
At the end of March it had a total of 47 holdings with 58.4% invested in the US and the rest spread pretty evenly around the world. About half of the fund consists of utilities like gas and electric that shouldn’t have suffered as a result of the lockdown, with the balance in more demand based assets such as highways and railways. It has a yield of 3.5% with the income paid twice a year.
Legg Mason infrastructure is smaller with AUM of £518m and has less of a track record, having been established in July 2016. Rather than tracking an equity infrastructure benchmark it aims to outperform the OECD G7 inflation index by 5.5% over an investment time frame of five years (gross of fees).
The different mandates probably account for the contrasting nature of the portfolios, as at the end of March its 39 holdings were mostly invested in electric, gas and water utilities that together made up 87% of the assets. Its geographic allocation was also dissimilar with the US, UK and Australia accounting for 27%, 18% and 15% of the fund respectively.
Greater focus on income
Legg Mason has a much greater focus on income and the steady nature of the underlying holdings should enable it to largely protect its dividends. It has a high historic yield of six percent with quarterly distributions and even if some of the underlying companies have to make cuts this would still look attractive.
Both of these infrastructure funds invest in equities and despite the relatively defensive nature of the underlying businesses they have each experienced losses this year along with the wider market. Over the three months to the end of March Legg Mason was down 12.19% and First State 14.2%, but the three-year returns to 17 April of 13.5% and 7.4% are still acceptable given what has happened.
No equity-based fund could have withstood the dramatic market sell-off, yet the declines are much more modest than most other sectors and reflect the essential nature of the services provided. This also means that the dividends should be relatively secure, which shows the value of including these sorts of funds as part of a diversified portfolio.