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Managers highlight infrastructure trusts for cautious investors

16 May 2017

Stable returns and higher yields are some of the benefits infrastructure trusts can bring to a portfolio, although an eye needs to be kept on valuations in the space.

By Gary Jackson,

Editor, FE Trustnet

Infrastructure investment trusts can be a source of "interesting" returns for cautious investors, managers have argued, but attention needs to be paid to the relatively high premiums seen in the sector.

Demand for infrastructure assets has risen in recent years as investors' search for income sources in the low interest rate environment continued and a sense of caution pushed them towards areas of perceived safety.

FE Analytics shows that the average member of the AIC's Infrastructure sector has made a 63.23 per cent total return over the past five years. This is below the 102 per cent made by the MSCI AC World index, although the outperformance of global equities has been boosted by the recent weakness of sterling and is much narrower when this is stripped out.

Performance of sector vs indices over 5yrs

 

Source: FE Analytics

Meanwhile, the average infrastructure trust has offered a smoother ride with annualised volatility of 5.63 per cent and a lower maximum drawdown than both global equities and global government bonds. Furthermore, the average yield of 4.6 per cent looks attractive when compared with equities and bonds.

Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), said: “Infrastructure has proved to be a popular sector for income-seeking investors over recent years and the sector has grown rapidly in size. With the sector having a dividend yield of almost 5 per cent, it’s not hard to see why.”

She adds that the closed-ended structure of investment companies is “particularly suited” to illiquid assets such as infrastructure as managers do not have to worry about inflows and outflows when building their portfolios. This, she argues, allows them to take a long-term view on their investments while investors remain free to buy and sell shares in the trust.


Considerations such as this have led Seven Investment Management to return to infrastructure trusts after being absent from the space for the past five years.

The firm has been buying trusts such as HICL Infrastructure, BBGI and International Public Partnerships over the past two months for its 7IM Cautious, 7IM Unconstrained and Personal Injury funds.

Alex Scott, deputy chief investment officer at Seven Investment Management, said: “While bonds have delivered stunning returns over the last few years, the issue of how to manage cautious portfolios in a low interest rate environment, and when bond income just isn’t there, is one of the fundamental issues facing fund managers.

“Our re-entry into the infrastructure investment company sector is a reaction to the environment we now find ourselves in. Managers of cautious portfolios need to be looking at assets that can still offer interesting returns while limiting overall portfolio volatility. For us, infrastructure investment companies can be part of that solution.

“We like the long-term, predictable cash flows that infrastructure investment companies can offer, with a high degree of inflation linking and low economic market sensitivity, backed by public sector entities. Recent fund-raisings in the infrastructure sector have offered an attractive entry point.”

Performance of trusts over 5yrs

 

Source: FE Analytics

As the above chart shows, the £2.8bn HICL Infrastructure investment company has been the top performer over the past five years with an 83.72 per cent total return. The portfolio is built around more than 100 investments that span a range of sectors including education, health and transport in the UK and overseas.

InfraRed Capital Partners, the investment advisers to HICL Infrastructure, says the number of opportunities within infrastructure remains healthy but adds that is important to avoiding overpaying for assets in the popular sector.

InfraRed Capital Partners director Harry Seekings said: “[The company] is following a clear acquisition strategy for HICL which is focused on three core market segments: PPP [public-private partnership] projects, regulated assets and demand-based assets.


“Overall deal flow is reasonable but we find that the mix differs between geographies, e.g. secondary PPPs in the UK, regulated assets in the UK and Europe and primary PPPs in North America. Competitive pressure remains and pricing discipline is fundamentally important.”

The recent popularity of infrastructure can be seen by the fact that the infrastructure sector has grown to be the fourth largest in the AIC universe with total assets approaching £9bn.

Meanwhile, the average member of the sector is now trading on a 14.6 per cent premium to net asset value, reflecting the strong demand for infrastructure trusts in recent times. BBGI is trading on the highest premium at 17.7 per cent; Sequoia Economic Infrastructure Income is on the lowest at 9.3 per cent.

Given this, infrastructure managers are mindful of the need to focus on valuations in what can be an expensive market but maintain that sources of good risk-adjusted returns can still be found.

Bernardo Sottomayor, partner at 3i Group plc, the investment advisers to 3i Infrastructure plc, said: “We believe the infrastructure market offers attractive investment opportunities, although with interest rates still near all-time lows, demand, in particular for large regulated infrastructure assets, continues to be strong driving high prices and low projected returns.

“Against this backdrop, we are focusing on areas of the infrastructure market which offer better risk-adjusted returns, such as infrastructure businesses with some demand or operating risk. These businesses, whilst still displaying infrastructure resilient type cash flows, can be managed actively to enhance returns.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.