Infrastructure Funds for Income Investors

The options for income investors are few and far between, but could the answer lie with telecoms towers, toll roads, wind farms and airports?

Holly Black 02/06/2020 17:09:00
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The plight of income investors seems to get worse and worse. With interest rates at record lows, companies cutting dividends left, right and centre, and gilt yields in negative territory, there are few places for the income-hungry to feed.

Could infrastructure companies be the answer? There are two ways to access infrastructure: through investment trusts which actually own the assets – wind turbines, toll roads, data centres and the like – and through funds that focus solely on the equities of companies which operate in this space.

With many of the infrastructure investment trusts trading at a premium, funds that focus on equities could be worth a look instead. We consider the outlook for some of the sectors these funds invest in:


“Holes, wires and pipes” make up around 80% of the Legg Mason RARE Global Infrastructure Income fund, according to its manager Nick Langley: “These are very boring, regulated utilities – gas, electricity and water. But we like that, because ultimately what we’re looking for is a company that will invest in its assets and provide a reliable return.”

The fact these industries are regulated makes them particularly appealing, it allows them to increase their prices in line with inflation, making operating risk low and earnings predictable.

Crucially, the revenues of energy companies are not reliant on the amount of energy that moves through the network or the amount of water that flows through the pipes, which makes them more resilient at times of crisis. “The speed at which we come out of the crisis does not impact these companies from an earnings perspective, but it does affect how the market thinks about them,” he adds.

And that throws up opportunities: he particularly likes US utilities firms, which are yet to issue any profit warnings, and those in Europe where shares have endured a significant sell-off. Among the fund’s top holdings are electricity grid operators including Terna in Italy and Red Electrica (REE) in Spain.


Air travel has fallen off a cliff amid the Covid-19 crisis, with all but essential travel banned, and many firms across the sector have cut their dividends. This has prompted Langley to reduce his exposure to the airport industry. “They’ll be the most affected by this crisis in terms of the time to get back to usual operating capacity,” he predicts.

But Jim Wright, manager of the Miton Global Infrastructure Income fund, thinks primary airports will recover relatively quickly. He expects airlines to abandon smaller airports when travel does pick up again but thinks huge international hubs will prove resilient. He has stakes in Sydney and Zurich airports, Aena (AENA), which owns a number of Spanish airports, and Ferrovial (FER), which has a 25% stake in Heathrow. Wright says: “We try and remember why we bought these stocks in the first place. Air travel may not look exactly the same as it did pre-crisis, but these are great assets and they will recover in time.”

Telecoms Towers

They make not look pretty, but telecoms towers are one of Wright’s favourite current themes. “If there’s one thing lockdown has highlighted, it’s the crucial need for us all to have reliable, high-speed data,” he says.

Companies such as American Tower (AMT) own big mobile phone masts and let other businesses rent space on the towers on which to hang their antenna or satellite dishes. “Network operators pay an inflation-linked rent, so earnings increase every year and the contracts usually last 10 to 15 years,” says Wright. There’s little cost to operating the tower and concerns about aesthetics and radiation mean it’s difficult to build new masts, reducing competition. American Tower is also developing alternative solutions for use in cities, where there are fewer masts; so-called small cells that can be put on buildings or even lamp posts and bus shelters.

It’s a theme driven by the growth in connected devices, driverless cars and the Internet of Things as well as our constant use of smart phones and the internet – in short, there’s an ever-increasing need for data.

Renewable Energy

With climate change a top priority for many investors, it’s no surprise there are opportunities to be found in renewable energy. There are plenty of companies leading the way in the energy transition, whether its operating solar panels, modernising existing power grids or developing smart grids to power electric vehicles.

Among Langley’s largest holdings are TerraForm Power, which operates solar panels and wind farms across the US and Europe, and Florida-based renewable energy firm NextEra Energy Partners(NEE). He particularly likes the contracts renewable energy companies tend to have with their clients – often spanning 15 or 20 years – which means a reliable long-term income stream.

Wright, meanwhile, owns Danish company Orsted (ORSTED), one of the biggest offshore wind farm operators in the world. He adds: “We like themes like this that aren’t dependent on global trade or global growth or commodity prices – we want themes that will happen regardless of the economic environment.”

Tolls Roads, Data Centres and Beyond

Fewer cars on the road amid lockdown is bad for toll road operators and many of these businesses have cut their dividends. Langley continues to hold a toll road company in South Australia which has maintained its payout, however. At 4%, the stock’s dividend yield is among the lowest in the portfolio, but he thinks the prospects for growth are good.

Yet, while data centres may seem appealing in an environment of home-working and virtual learning, Langley is not keen on the sector and excludes it from his investment universe. This is primarily because of the shorter contracts customers in this space sign up to – typically just one to three years – which can make long-term earnings visibility harder to gauge.

Despite the issues faced by many industries, Langley is confident his fund can continue to deliver an income for investors. With a current yield of 6.5%, he thinks infrastructure can provide “capital protection and comfort” for investors.

Wright adds: “As investors look at their portfolios over the coming months and find that traditional sources of income have disappeared or reduced significantly, we need to prove our stocks can keep paying and growing their dividends.”


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Holly Black

Holly Black  is Senior Editor,


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