Borrows wants to find a good and growing yield for his investors across his two funds and given the relatively poor outlook for fixed income he has had to start looking into more niche asset classes to compliment his equity exposure.
As a result, he has turned to the recently launched John Laing Environmental Assets trust, which has a yield of 6 per cent, as well as a number of other opportunities within the infrastructure/renewable energy space.
“We haven’t been doing huge amounts with the portfolios recently, but we have using opportunities to build up our exposure to the renewable energy area,” Borrows said. “We have also been trimming our bond funds whenever we can. I still don’t like bonds at all.”
“We now have four renewable energy trusts, but the most recent one is John Laing Environmental Assets which takes our overall exposure to around 5 per cent. While the other trusts we hold are more specialised, John Laing invests in water, solar and wind power.”
“We have been looking a lot more at infrastructure recently because we want to be invested in real assets. With its high nominal starting yield of 6 per cent and its index-linked dividend, I think the trust looks attractive.”
The closed-ended John Laing fund only came to the market on the 31st March 2014 and Borrows bought the shares during its initial public offering (IPO).
According to FE Analytics, the trust has returned exactly 0 per cent since the end of the first day of trading just under two months ago.
Performance of trust since March 2014
Source: FE Analytics
Borrows bought the shares at net asset value (NAV), but it is currently trading at a 2.6 per cent premium.
Despite that, it still looks relatively cheap compared to its competitors. Data from the AIC shows that the IT Infrastructure sector is trading on a 13.2 per cent premium, with the likes of Bilfinger Berger Global Infrastructure and HICL Infrastructure Company trading on a premium of 15.34 per cent and 14.74 per cent, respectively.
John Laing Environmental Assets has a lower premium than the Infrastructure Renewable Energy sector, which currently trades 4.1 per cent above NAV.
According to the trust’s prospectus, 37 per cent of the portfolio is invested in water, 34 per cent in wind and 32 per cent in solar.
The management has fully invested the capital it raised from its flotation and now currently holds seven operational UK based solar, onshore wind, waste processing and wastewater projects.
The major reason why Borrows, and others like him, have been upping their exposure to infrastructure is due to its high and inflation-linked dividend.
Trusts within the sector are seen as a quasi-hedge against inflation is because the prices of the assets they invest in – renewable energy in the case of the John Laing portfolio – should rise in line with the CPI (consumer price index).
A number of industry experts, such as the FE Alpha Manager duo of Jenna Barnard and John Pattullo, say this isn’t as large a threat as many had previously made out as there is still a lack of bank lending and there is excess capacity in the economy.
However, Borrows says that the gradual rise in the price of goods and services is inevitable and therefore wants some form of protection against it within his portfolios as he doesn’t want his income to be worn away over time.
“I must say, I have been quite surprised with the lack of inflation we have seen. However, I do think that as the economy continues to recover the current slack in the economy will begin to erode which should lead to inflation,” Borrows said.
John Laing Environmental Assets isn’t geared and has charges of 1 per cent.
Borrows has managed his open-ended CF Miton Distribution fund since April 2004 and his closed-ended Midas Income & Growth Trust since August 2005.
According to FE Analytics, since Borrows took over his investment trust it has returned 45.06 per cent, which is half the amount of the IT Global Equity Income sector.
Performance of trust vs sector since August 2005
Source: FE Analytics
However, the performance of the trust has picked up in recent years and Borrows attributes his previous poor returns to his portfolios rigid dividend policy.
“Just over two years ago, we had quite a high income mandate which had become a real constraint. However, since we have reduced the dividend target it has given us a much more rounded return.”
“We still have a good income stream, as shown by our 4 per cent yield, but we can now deliver a better capital return,” Borrows told FE Trustnet earlier this year.
Our data shows that Midas Income & Growth has returned 47.34 per cent, which is seven percentage points better than the returns of the sector.
Performance of trust vs sector over 2yrs
Source: FE Analytics
Borrows invests in direct equities and funds. Currently, the manager holds more than 60 per cent in global equities, 17.5 per cent in alternative assets and just 9.4 per cent in fixed income funds.
His closed-ended fund currently yields 3.95 per cent, has gearing of 11 per cent and its ongoing charges figure (OCF) is 1.49 per cent.
