SHARES, bonds and the pound all had a tough September, as “higher for longer” interest rates due to stubborn inflationary pressures moved firmly centre stage. Data out early October showing an unexpectedly sharp rise in US job openings to 9.6 million in August has given central bankers one more thing to worry about1.
No wonder then that investors have been on the hunt for asset alternatives. Oil and bitcoin both proved successful investments last month, even as risk-on indices such as the Nasdaq 100 fell.
Among Fidelity’s personal investors, the investment trust Greencoat UK Wind remained a popular way of capitalising on the global energy transition. The seventh largest constituent of the FTSE 250 Index was the fourth biggest selling investment trust on the Fidelity platform in August2.
This represents a small part of a much wider trend to support infrastructure projects. After the worldwide disruptions of the past three years, many countries are looking to build stronger supply chains, increase their energy independence and upgrade their healthcare and transport facilities.
To do that, in the absence of sufficient government capital, projects need to offer investment returns high enough to attract private investment.
Greencoat UK Wind is a good example of how an alternative investment can help smooth returns when the general environment turns sour. This trust is exposed to inflation-linked revenues and high power prices, so benefits directly from factors that are negatives for both shares and bonds.
It’s exposed as well to the political will to reduce carbon emissions, which is also likely to have a low correlation with inflation, interest rates and the stock market.
The trust’s interim results released at the end of July confirmed solid progress, with the managers saying a difficult fundraising environment for the wind industry have enhanced the investment opportunities open to them3.
There are peculiar risks to investing in infrastructure, as highlighted by the UK government’s decision to scrap the northern leg of HS2 or the Thames Water debacle in June.
Then there is the risk that consumer habits change, wrong-footing the best-laid, long-term plans. The pandemic only accelerated the switch to online, meaning e-commerce logistics buildings and data centres are currently where it’s at. Personal storage units are another boom area. Once upon a time it was shops and offices.
For these reasons, it remains sensible for most investors to diversify across a range of infrastructure projects and funding arrangements. Our Select 50 list of expert-picked funds offers an idea in the form of International Public Partnerships Limited (IPPL).
Like Greencoat UK Wind, IPPL is closed ended. That means it has no need to dispose of its assets – which are invariably longer term and illiquid – when investors decide to sell their shares in the market.
IPPL invests in high quality infrastructure projects and businesses the world over and aims to provide investors with stable, long-term, inflation-linked returns based on growing dividends and the potential for capital appreciation.
Based on its initial offer price of 100 pence per share IPPL targets an internal rate of return of 7% per annum4. This amount is not guaranteed. Furthermore, based on the current share price of 120 pence, this internal rate of return would be worth less to an investor.
Sources:
1 Bureau of Labor Statistics, 3 October 2023
2 London Stock Exchange, 4 October 2023