Funds: Buy into the coming infrastructure boom
For investors, massive government stimulus spending is generating some big opportunities. Here's how to get your share of the profits.
Next time you grind to a halt on a busy UK motorway, spare a thought for drivers in other countries. Poor road conditions cost US motorists $67 billion a year in repairs ($333 per driver). Meanwhile, Russia's slapdash road system is robbing the country of about 3% of its GDP, according to government estimates.
But for investors, a wall of government stimulus spending is generating some big opportunities. Governments globally will fork out $35 trillion in public works spending over the next 20 years, according to CIBC World Markets, as they seek to build and repair everything from railway lines and water pipes to airports and high schools.
China alone is spending £88bn on intercity rail lines between 2009 and 2011, while $10 billion is being invested in Africa annually as power stations and mobile phone masts are rolled out across the continent. Investment trusts are one of the best ways to play the infrastructure sector. So it's a pity there are not more UK listed ones to choose from. HSBC Infrastructure (LSE: HICL) is one of the best and "probably boasts the safest set of assets", says the FT's David Stevenson. Up 31% since launching in March 2006, it trades at a small premium to its underlying net asset value.
Offering a yield of 8.6%, and with 29 of its 30 projects effectively government-backed, it's a decent long-term play. 3i's infrastructure fund (LSE: 3IN) is another solid, albeit riskier, bet.
As well as holding relatively safe UK assets such as an investment in Alpha Schools which has a long-term contract to build and operate 11 schools in the highlands of Scotland it also holds more speculative assets such as a German waste to energy plant. Plenty of cash, a discount to net asset value of 8.6% and a yield of 5.4% all make it attractive. It's up 24.6% year to date. Further up the risk scale, and only for investors willing to gamble on losing capital, there's the Aim-quoted PME African Infrastructure Opportunities Fund (LSE: PMEA). It is more speculative than the other two funds, reflected in a 49% fall since its launch in July 2007 (against a 2.3% drop for the MSCI Emerging Markets Index).
However, it offers investors one of the few ways to access some exciting African plays cheaply. These include TMP Uganda Limited, a broadband provider, and Sheltam Holding, a pan African railway company. On a price/book valuation of just 0.55, the fund could deliver patient investors more upside than most other infrastructure funds.