With stockmarkets around the world tanking, investors are on the look-out for defensive plays. One investment favoured by nervy investors just now – other than gilts – is infrastructure funds. Infrastructure assets such as toll roads, airports and utilities are seen as safe havens, as they tend to generate cash in any climate. Investors caught on to this idea late last year, when they started piling into the sector, driving funds such as 3i Infrastructure up by 22.6%.
But all that money flooding into the sector has made some of the top funds rather pricey-looking. The 3i fund trades on a 13.2% premium to its net assets. And infrastructure is by no means as safe a bet as investors might think. In the past few years, the availability of cheap credit allowed infrastructure funds such as Babcock & Brown to pull off big deals, such as the e2.4bn acquisition of Irish telecoms group Eircom.
But now they’re finding it harder to raise capital. Speculation abounds as to whether groups such as B&B and Australia’s Macquarie have grown too fast, spent too much and taken on too much debt. As the cheap money available has dried up, so has the deal-making. In the last quarter of 2007, infrastructure deals worth $11.3bn were attempted in the UK, says The Daily Telegraph. This year, just four worth $121m were attempted in the first quarter.
Clearly, infrastructure funds are not immune to the credit crunch, something that has yet to be reflected in their share prices. And with people driving and flying less as fuel bills rise and incomes are squeezed, toll roads and airports won’t generate as much income for their owners.
But there is one aspect of the infrastructure boom that still seems safe – water. Regardless of how bad the economy gets, people still need drinking water. The price tag on upgrading America’s outdated water infrastructure is between $300bn (£153bn) and $1 trillion (two-thirds of which is for distribution pipes and pumps), says Kathryn Cooper in the Sunday Times, and both Barack Obama and John McCain have committed themselves to finding a solution.
The easiest way for investors to get exposure to some of this spending is through a range of exchange traded funds (ETFs), which invest in everything from small-cap filtration companies to blue-chip utilities. The biggest fund in the sector is the US-listed PowerShares Dynamic Water Resources (US:PIO) ETF. The fund launched three years ago, and tracks the Palisades Water Index. It has gained 7% over the past year.
Alternatively, the First Trust ISE Water (US:FIW) index fund is up 14.5% and has a 88% exposure to US stocks, compared with 27% for the Powershares ETF. Considering that America is where the action in the water sector is likely to be over the next few years, this is probably a better bet.