Following years of ultra-low interest rates, investors have been scrambling to find any investment that can offer them a decent level of income.One of the major beneficiaries of this has been infrastructure trusts, which offer a high and rising level of income in line or above inflation.
The trusts have performed very strongly of late, driven by rallying premiums into the double digits.
However, Hewitt – manager of the F&C Managed Portfolio Growth Investment Trust – says that investors basing their decisions on past performance will be hugely disappointed.
He says the sector should be avoided at all costs, because premiums will narrow when the Bank of England tightens monetary policy.
“I’m not going to go and pay a 10 per cent premium,” Hewitt (pictured) said.
“People talk about why certain infrastructure trusts are trading on 10, 12 or even 15 per cent premiums. They are not going to lose that overnight – it’s a function of interest rates being so low.”
“Yes they’ve got dividend yields, although not as high as they were, around 4 or 5 per cent. However, investors have got to be very careful [buying now].”
“Interest rates are likely to go up over the next year and if you are taking a three or four year view, while you are locking in income, you are also probably locking in capital losses at the same time,” he added.
One of major reason why infrastructure trusts have been so popular is because the asset class is so illiquid, meaning there aren’t open-ended alternatives.
Moreover, as well as offering a yield well-above those you can find on bond or equity funds, dividends are hedged-against inflation due to the nature of projects the trusts are involved with.
According to FE Analytics, closed-ended funds such as HICL Infrastructure, International Public Partnership and GCP Infrastructure Investors have delivered equity-like returns over three years, with considerably less volatility.
Performance of trusts vs index over 3yrs
Source: FE Analytics
Though the average trust in the IT Infrastructure sector still yields 5.68 per cent – far higher than equivalents in equity sectors – the average premium has risen to 12.5 per cent premium, according to the AIC.
The trust with the lowest premium in the sector is International Public Partnership, on 7.01 per cent, while HICL Infrastructure has the highest at 16.57 per cent.
Source: FE Analytics & the AIC
Monica Tepes, analyst at Cantor Fitzgerald, disagrees.
While she accepts that infrastructure trusts aren’t as attractive as they were, she says that their characteristics make them one-of-a-kind investments.
“I think the opportunity presented by the [infrastructure] sector is compelling relative to other asset classes, especially at this moment in time,” Tepes said.
“From an absolute return perspective returns may not look exciting, but given the yield, inflation protection, safety characteristics and current environment for risk assets, I think there is a good case for holding these assets at this point in time and not just by low risk investors.”
Commercial property trusts have been another area which have benefitted from the ultra-low interest rate environment.
While investors can use open-ended funds for their exposure, managers are compelled hold a high level of cash to keep liquidity to a maximum. This is a turn-off for many investors, as this causes a drag on performance.
The demand for income has pushed the average trust in the IT UK Direct Commercial Property sector onto a 9.1 per cent premium.
Source: FE Analytics & the AIC
Though the sector does look expensive, Hewitt says there is a big difference between property and infrastructure.
“Are property trusts too expensive? Yes, but [the difference is] that infrastructure NAVs don’t grow that quickly. Property NAVs can and currently are,” Hewitt said.
“I do have a property holding in my portfolios. I’m seeing them this afternoon and one of the questions I will ask is, ‘you are on a premium now – how confident are you that over the next six to 12 months asset growth will [justify that]?”
“Still, you do have to [be careful]. If premiums go well into double digits, you are borrowing future performance just to own it.”
Hewitt holds the Schroder Real Estate Investment Trust as a top-10 holding in his F&C Managed Income Portfolio Trust.
According to FE Analytics, Hewitt’s trust has been the best performing portfolio in the IT Global Equity Income sector over five years with returns of 91.56 per cent, beating its benchmark – the FTSE All Share – by more than 20 percentage points.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
Hewitt’s top-10 includes FE Alpha Manager James Henderson’s Lowland Investment Company, Alastair Mundy’s Temple Bar IT and FE Alpha Manager Mark Barnett’s Perpetual Income & Growth IT.
F&C Managed Income Trust isn’t geared and is trading on a 1 per cent premium.
It yields 4.1 per cent and has ongoing charges of 1.16 per cent.
