INVESTMENT FOCUS-Investors see British infrastructure getting stimulus boost after Brexit

* Bets rise on infrastructure as next UK stimulus

* Investors look to add to holdings in the sector

By Alasdair Pal

LONDON, Aug 19 (Reuters) - UK infrastructure funds arehitting record highs on the prospect of more government spendingafter Britain's vote to leave the European Union, bolstered bythe view that the effectiveness of ultra-loose monetary policyis reaching its limits.

The Brexit vote looks likely to lead to a short-termdownturn in building activity: the latest PMI data showssentiment in the construction industry at a seven-year low, while some infrastructure projects have been heldup on increased uncertainty.

But that weakness looks likely to increase the chances of agovernment-backed shot in the arm for the industry, with newPrime Minister Theresa May open to the idea of usinginfrastructure to stimulate a flagging economy.

Fund managers are playing the trend in two ways: throughinfrastructure funds that invest in toll roads, hospitals andschools; and by buying companies that could benefit from anygovernment-backed boost in building.

Investor interest was piqued by a speech given by Mayshortly before becoming PM, in which she promisedTreasury-backed bonds for new infrastructure projects - adeparture from six years of spending cuts under David Cameron'sgovernment.

May has made infrastructure spending a cornerstone of herindustrial strategy, aimed at kickstarting an economy weakenedby Brexit, a move under consideration across developed economieson fears over the effectiveness of ultra-loose monetary policy.

With Bank of England governor Mark Carney ruling outnegative rates, and UK finance minister Philip Hammond saying hewill take "any necessary steps" to support the economy,investors are positioning for the use of infrastructure as apolicy tool.

Gavin Haynes, managing director of wealth managerWhitechurch Securities, has doubled clients' exposure to globalinfrastructure funds post-referendum, at the expense ofcommercial property and European equities.

"We see it as a global trend - it is not just about Brexit,"he said. "Traditional monetary policy seems to be running out ofsteam to stimulate the economy."

BRICK MAKERS TO BUILDERS

Infrastructure trusts, including those run by III and John Laing , have hit record highspost-referendum, extending gains after the BoE cut interestrates on Aug. 4.

Their performance contrasts with that of property investmenttrusts, which that have slumped on fears of price declines asbusinesses abandon London as a European base.

"There is a lot of demand for government-backed incomestreams," said Colette Ord, an analyst covering property andinfrastructure trusts at Numis. "They are seen as beinghigher-quality."

That safety comes at a price, however: the averageinfrastructure trust investing in government-backed assets istrading at a 20 percent premium to net assets, an all-time high.

Investors concerned with trust valuations are insteadlooking to stocks that may benefit from a pick-up inconstruction - from brick-makers to builders' merchants.

Tony Yarrow, a fund manager at Wise Investments, has beenadding to his holdings in the sector, that include constructioncompany Kier and brick-maker Ibstock.

"If I were May or Phillip Hammond I would be saying 'theenvironment has changed: we can borrow as much money as we wantalmost for nothing'," he said.

"There is a massive need for infrastructure in the UK."

Part of the attraction for Yarrow of a company like Kier isthat a large chunk of its revenues come from more stablesources, including motorway maintenance and refuse collection.

Analysts at Barclays estimate the UK requires 215 billionpounds of investment to replace ageing utilities infrastructureand wean the economy off carbon-based fuel.

"Construction companies are priced as though they are in aneconomy that is going into recession, but if there is any sortof stimulus valuations look pretty attractive," Yarrow added.

Costain is the most exposed to the theme, with 90percent of its revenues coming from UK construction, accordingto JP Morgan, followed by WS Atkins, Interserve and Kier. Balfour Beatty and Carillion couldalso see a boost, the bank's analysts said.

Stephen Bailey, a fund manager at Liontrust, and whose fundis among Kier's largest shareholders, has also been adding toholdings that he believes have been unfairly penalised.

"Central banks have got to be quite inventive: most trickshave been tried," he said. "I'm not a believer that cuttingrates will stimulate growth, but construction could be a way ofproviding that kind of stimulus."

(Editing by Vikram Subhedar and Toby Chopra)