Investors have increasingly turned to infrastructure in recent years as they seek to diversify exposure to expensive equity and bond markets, leaving many of the trusts focused on the space trading at premiums.
Despite this, Numis analysts say there are still some attractive options in the listed infrastructure investment trust market as strong track records and healthy income streams continue to catch investors’ eyes.
There are 13 London-listed infrastructure funds covering sub-sectors: public–private partnerships (PPP), private equity infrastructure, renewables and debt. This gives investors exposure to assets ranging from schools, hospitals and roads to energy transmission, generation and oil storage facilities, both in the UK and internationally.
In the following article, we find out which four infrastructure trust are considered ‘core’ picks by the analysts over at Numis – two from the PPP space and two looking at renewable energy.
International Public Partnerships
When it comes to PPP companies, Numis has a long-term preference for businesses that have positioned themselves to deliver attractive risk-adjusted returns through the economic cycle by keeping a close eye on the quality of their cash flow and the impact of factors such as life cycle risk, inflation linkage and currency hedging.
Performance of trust vs sector and indices since launch
Source: FE Analytics
“In this regard, we believe that International Public Partnerships has an advantage over its peers, reflecting its primary origination capabilities,” Numis’ analysts said. “These have facilitated a number of attractive acquisitions in 2016 which we feel will continue to underpin a robust portfolio performance. Notably, this includes the highest inflation linkage amongst the peer group.”
International Public Partnerships has 100 per cent ownership of around two-thirds of the portfolio. It also an easy-stage investor in 88 per cent of its assets, which the managers say helps to maximum capital growth opportunities.
As the above table shows, the fund has outperformed its average peer as well as its FTSE All Share and FTSE 250 benchmarks since its launch in November 2006 with a 145.50 per cent total return. It has down this with lower annualised volatility and maximum drawdown than the sector and the two indices.
International Public Partnerships has ongoing charges of 1.31 per cent, is trading on a 9.2 per cent premium to net asset value (NAV) and is yielding 4.5 per cent, according to figures from the Association of Investment Companies. It is not geared.
3i Infrastructure
Next up is the £1.9bn 3i Infrastructure investment trust, which has generated a 227.16 per cent total return since its inception in March 2007. The trust holds the maximum of five FE Crowns thanks to its superior performance in terms of stock picking, consistency and risk control over recent years.
Performance of trust vs sector since launch
Source: FE Analytics
“3i Infrastructure is differentiated from the PPP peer group as it seeks to invest in asset owning businesses, rather than finite life concessions,” Numis said.
“Nevertheless, it has also experienced a significant increase in competition for assets in recent years, making it more difficult for the team to source new projects at historic target returns. In particular, sovereign wealth and pension fund investors have been keen direct buyers of these essential assets.”
In reflection of this, the trust has gradually introduced more flexibility to its target return, taking it down from the 12 per cent aim in May 2013 to a target of between 8 and 10 per cent a year that it has today. It has also been rotating out of regulated investments toward target mid-market, private equity-style assets.
3i Infrastructure has ongoing charges of 1.68 per cent (according to its latest annual report), is trading on a 15.9 per cent premium to NAV and yields 4 per cent. It is not geared.
Bluefield Solar Income
When it comes to trusts in the renewables infrastructure space, Numis points out that it is difficult to compare between funds because of the different capital structures, technology mix and operational maturity of projects, combined with varying levels of disclosure. This makes renewable assets hard to value, especially when compared with regulated infrastructure assets.
In light of this, Numis likes renewables trusts that focus on a single technology as this makes it easier to analyse their financial models and come to a valuation. One of its preferred funds in the space is the £392.5m Bluefield Solar Income trust.
Performance of trust vs sector since launch
Source: FE Analytics
“More specifically, Bluefield Solar provided a step by step breakdown of how its valuation assumptions compared with actual results for the year ending 30 June,” Numis said.
“This included key additional data points for the market to analyse and gave comfort that the management team apply a conservative approach to valuing the asset base. This is further supported by its ability to deliver a higher covered dividend compared to the peer group. In our view, this transparency warrants a premium versus other solar operators.”
Bluefield Solar Income has ongoing charges of 1.25 per cent, is trading on an 8.85 per cent premium, is 21 per cent geared and yields 6.7 per cent.
Greencoat UK Wind
The second renewables trust pick from Numis is Greencoat UK Wind. Again, the analysts like the fact that it focuses on a single technology and provides greater disclosure versus the wider peer group.
Performance of trust vs sector since launch
Source: FE Analytics
The portfolio concentrates on UK wind farm projects and is currently invested in 19 operating farms, with an aggregate net installed capacity of 420MW. Most of its holdings are in Scotland, are onshore and less than five years old.
However, they add that investors should not necessarily buy the trust on its current valuation: “Whilst the current rating of Greencoat UK Wind appears high, particularly in the face of weaker wind generation towards the end of 2016, we would only be comfortable adding to holdings on share price weakness.”
Greencoat UK Wind has ongoing charges of 1.49 per cent, is trading on a 17.6 per cent premium, is 12 per cent geared and yields 5.2 per cent.