HICL Infrastructure, BBGI and 3i Infrastructure are three closed-end strategies where negative sentiment towards the sector may present investors with a buying opportunity, according to Winterflood Investment Trusts.
The infrastructure sector has been rocked by a number of issues during the past year including the collapse of government contractor Carillion and increased political uncertainty in the UK causing it to sell off over the last six months.
Indeed, sectors with exposure to infrastructure companies such as support services, construction & materials and utilities have also struggled over the past six months, as the below chart shows.
Performance of indices over 6mths
Source: FE Analytics
“While sentiment has undoubtedly been affected, we believe the fundamentals of the underlying funds remain sound,” said Winterflood analysts.
They noted that, in particular, results published by three private finance initiative/public-private partnership (PFI/PPP) focused trusts during March had revealed strong net asset value (NAV) performance in 2017.
“In our view the results were an illustration that the fundamentals of these infrastructure portfolios remain broadly unchanged and competition for the underlying assets in the broader infrastructure sector remains strong,” they said.
However, the analysts added share price performance had not reflected the performance of the underlying assets as “negative political rhetoric” around the model, the threat of nationalisation and the fall-out from the collapse of Carillion has taken a toll.
“Given the rapid decline in ratings within the sector in recent months it is worth looking back at how ratings have fared in periods when there has been little buying interest in the sector,” they said.
“As 2008/9 demonstrated, discounts on funds investing in illiquid assets can open up rapidly when there is significant selling in the market and there is potentially limited scope for funds to buy back shares.”
Winterflood explained that while it does not believe discounts will reach levels seen a decade ago, it is possible there could be some further widening.
Below, FE Trustnet explores the three infrastructure trusts highlighted by Winterflood in more detail.
3i Infrastructure
First on the list is the five FE Crown-rated 3i Infrastructure, a recent addition to the firm’s model portfolio that they believe has limited exposure to political uncertainty in the UK.
The £1.7bn trust invests in mid-market economic infrastructure and greenfield projects in developed markets, focusing mainly on the UK and Europe.
The trust – which is part owned by private equity parent 3i – aims to provide investors with a total return of between 8-10 per cent annually over the medium-term with a progressive annual dividend. It is managed by the 3i infrastructure advisory team led by managing partner Phil White.
Investment sectors include utilities, network infrastructure, social infrastructure (particularly schools and hospitals), transport and energy pipelines.
Annual performance of trust vs sector over 5yrs
Source: FE Analytics
“In our view 3i Infrastructure offers an attractive mix of defensive, stable income with the potential for capital growth from its investments in companies that own their assets in perpetuity,” Winterflood analysts noted.
“Although the fund is currently trading on a premium this has contracted significantly over the last year and in our view offers an attractive entry point.”
Last year 3i Infrastructure delivered a total return of 15.84 per cent compared with a gain of 2.54 per cent for the average IT Infrastructure sector trust.
Over five years the trust has delivered an annualised total return of 19.75 per cent.
It has a yield of 3.88 per cent and is trading at a 0.4 premium to NAV. It has an ongoing charge plus performance fee of 1.69 per cent, according to the Association of Investment Companies (AIC) and is not geared.
HICL Infrastructure
Another infrastructure trust backed by Winterflood is HICL Infrastructure, which the firm has decided to retain in its model portfolio despite poor performance year-to-date.
The £2.4bn trust is managed by UK-based infrastructure and real estate asset manager InfraRed Capital Partners.
The closed-end fund targets long-term, stable income and aims to preserve the portfolio’s capital value over the long term with the potential for capital growth.
HICL Infrastructure’s target market segments include private-public partnership projects (including social and transportation), regulated assets (such as gas & electricity distribution and water utilities), demand-based assets (like toll roads and student accommodation), and opportunistic investments with long-term counterparty arrangements (such as rolling stock).
While around three-quarters of its 100-plus holdings by value are held in the UK it also has investments in Europe, North America and Australia.
Winterflood estimates that the trust is trading at a 9 per cent discount to NAV when income is included, which given its yield of 5.8 per cent presents a “value opportunity”.
However, the firm is awaiting the publication of the trust’s full-year results after which it will revisit the investment case.
Over 10 years HICL Infrastructure has delivered a total return of 97.28 per cent, slightly underperforming the average peer’s gain of 132.13 per cent.
Over the past year to 11 April, however, the trust has recorded a loss of 17.13 per cent compared with a 0.47 per cent loss for the average sector peer.
According to data from the AIC, the trust is not geared and has ongoing charges of 1.18 per cent.
BBGI
Finally, Winterflood analysts highlighted BBGI, which invests in a concentrated portfolio of PFI/PPP infrastructure assets diversified by geography and sector. The £644.4m trust has a portfolio of 39 assets across the UK, Europe, Canada, Australia and the US.
Assets typically have strong yield characteristics, contracted government-backed revenue streams, inflation-linked returns and long-term contracts. The trust is overseen by co-CEOs Frank Schramm and Duncan Bell.
“Although it still trades on a premium, we find its de-rating more difficult to justify than for some of its peers given its relatively low exposure to UK political uncertainty and its lack of exposure to Carillion,” the Winterflood analysts noted.
“In our view the fund’s portfolio is at the lower end of the risk spectrum with its solely availability-based portfolio that is biased towards roads and bridges, which the managers argue are simpler to manage and have lower risk.”
Performance of trust vs sector since launch
Source: FE Analytics
Since launch at the end of 2011, the trust has delivered a 64.44 per cent total return compared with a 68.03 per cent gain for the average infrastructure sector peer.
BBGI is trading at a premium of 6.3 per cent to NAV, is not geared, has a dividend yield of 4.8 per cent and ongoing charges of 1.28 per cent, according to the AIC.