When we tipped 3i Infrastructure (3IN) at 113p back in April 2010, we said it offered "the chance to pocket a nice dividend yield with the opportunity for capital growth on top". The fund then had cash to splash and looked like a promising investment. We tipped it again in September 2011 at 118p for its high-yield inflation protection.
Today, the fund trades at 125p, a 3.75 per cent premium to net asset value (NAV) and offers a healthy dividend yield of 4.7 per cent - albeit much lower than what was expected to transpire at launch. It also still has high inflation linkage.
However, the fund has announced a solid, but dull, set of interim results. Although the NAV has recorded a modest gain, frustratingly little progress has been made in reaching full investment.
3i Infrastructure is a Jersey-incorporated, closed-ended investment company that is building a diversified portfolio of infrastructure investments across the globe, with a focus on Europe and India. The fund invests in infrastructure assets such as water utilities and private finance initiatives in education and healthcare. It listed on the London Stock Exchange in March 2007 and is a constituent of the FTSE 250 index.
Alan Brierley, director of investment companies at Canaccord Genuity, says: "With the company now well into its sixth year, the cash holding increasingly begs the question of whether the manager has been too risk-averse and/or too unrealistic on pricing with regard to new investments."
The cash balance, which is £170m, has acted as a drag on returns. Cash still accounts for 16 per cent of the portfolio, compared with 37 per cent when we tipped it in April 2010.
During the six-month period to 30 September, the company made just one new investment of £5m, although last month it announced a £15m commitment to Dalmore Capital Fund, which has acquired a portfolio of UK PFI assets from Interserve. The company continues to assess a number of investment opportunities, including the Thameslink project where it is part of a consortium that is the preferred bidder. The company states: "While there have been attractive assets changing hands in the infrastructure market over the past six months, relative price points for many deals have been high."
The investment in 3i India Infrastructure has also been disappointing. This is a $1.2bn fund that invests in the rapidly growing Indian infrastructure market. It focuses on the power, ports, road and airport sectors.
3i Infrastructure is not your only option for exposure to this sector, as there are a number of players within the investment trust space investing in social infrastructure - HSBC Infrastructure and GCP Infrastructure Investments, which focus almost exclusively on the UK, International Public Partnerships and 3i Infrastructure and John Laing Infrastructure, which include overseas projects in their portfolio.
Mr Brierly favours HICL Infrastructure (HICL) as a "core holding for a 'lower for longer' environment", pointing out that HICL is set to achieve its target 7p dividend for the year to 31 March 2013, which would equate to a yield currently of 5.7 per cent.
Note, however, that HICL trades at a 9.9 per cent premium. It is 89 per cent invested in the UK. 3i Infrastructure is only 52 per cent invested in the UK, with 36 per cent exposure to Continental Europe and 12 per cent to Asia.
3i Infrastructure (3IN)
|Market cap||£1.1bn||Price premium to NAV||3.67%|
|Set-up date||13 March 2007||Yield||4.70%|
|Manager start date||Cressida Hogg (30 January 2009)||Gearing||100%|
|Total expense ratio||1.79%||Contact||http://www.3i-infrastructure.com|
Portfolio as at 30 September 2012
|Investment||Date of investment||% of NAV|
|Anglian Water Group||2007||20.2|
|Elenia (formerly LNI)||2012||18.7|
|Eversholt Rail Group||2010||14|
|3i India Infrastructure||2008||10.3|
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