HICL takes cautious approach to acquisitions

"It would be easy to issue shares and buy stuff to invest in, but I don't want to buy just anything," says Mr Roper. "And we will not take cash unless we have got an investment home for it. Some of our peers are suffering from cash drag. We have done a fair range of acquisitions recently (10 between 1 April and 26 July) and our last capital raising in March was over subscribed. It would be nice to close the gap but with interest rates so low demand for our shares will continue for some time to come. I also don't see this investment trust sector de-rating any time soon.

"We are comfortable with our portfolio and careful with what we acquire. We won't pay for assets that won't deliver."

While the premium is still high, Mr Roper argues that you still get a 5.3 per cent yield for this. "If I was an interested investor and could wait for a bit I would take part in one of the share issues this trust does every so often," he says.

This can offer the opportunity to get into the trust a lower premium to NAV.

(Read more on when it's ok to buy a trust at a premium)

PF2

One of HICL's main investment areas is Private Finance Initiative (PFI) and Public Private Partnership (PPP) schemes. Last December, the government announced the successor to the current set up – PF2. However, HICL says that it is too early to say whether these projects, when executed, will meet its criteria. HICL wouldn't get involved with these at the outset in any case, because most of its assets are bought after they start operating and yielding rather than during the construction phase.

An exception is the Allenby & Connaught PFI Project, a concession to design, build and finance new and refurbished Ministry of Defence accommodation across four garrisons on Salisbury Plain and in Aldershot, which was acquired in July. The trust's investment team is considering a few other projects under construction.

"These do not offer yield but you get some NAV growth and a better yield when it comes on stream because you bought in early," explains Mr Roper. "But we won't invest in highly complex construction projects such as tunnels."

Projects under construction also add in a number of risks.

If PF2 schemes come on stream in the next year or two, then HICL would seek to invest in them maybe a few years later when they are constructed and operational.

Three investment trusts have come to market this year which invest in alternative energy infrastructure such as solar power and wind (read more on this), with a fourth, Foresight Solar Fund, currently seeking £200m in an initial public offering. While some of HICL's broader infrastructure trust peers such as GCP Infrastructure (GCP) include some of these types of assets, HICL is going to stick with what it currently invests in.

"Our investors like us for what we do, so we don't expect to invest in renewables," says Mr Roper. "InfraRed Capital Partners has also brought The Renewables Infrastructure Group (TRIG) investment trust to market – our investors prefer a separate vehicle for these kinds of assets."

HICL will continue targeting assets in areas such as PFI roads, accommodation, schools and hospitals. There has been an increase in valuations for such projects in the secondary markets where HICL seeks operational assets, but the trust reports that its long-standing relationships with key industry participants have helped it continue to acquire appropriately priced opportunities, without having to go to auctions. HICL's managers also have a preference for 100 per cent ownership of projects and will look to make incremental investments in projects where the fund currently owns less than this.

Its two most recent investments were top-ups: the remaining 50 per cent equity interest in Newton Abbot Community Hospital Project and a further 5 per cent equity and loan notes interest in the Connect Project, giving HICL a 33.5 per cent interest. Connect is a 20-year concession to upgrade and operate London Underground's radio and telecommunications systems.

However, HICL has been outbid on some of the projects it would have liked to have invested in. Over its last financial year to 31 March it bid in 15 auctions and was successful in three. "We won't go to the price some do and if others continue to bid these high we won't chase the market to buy them," says Mr Roper. "This is not a concern for us at the moment, but would be if it continued. We don't need another asset to deliver our investment commitment to our shareholders, but it would mean we couldn't issue more shares so it would be harder to control the premium."

HICL aims to provide investors with long-term distributions at sustainable levels and preserve the capital value of its investment portfolio over the long term with potential for capital growth. The trust has a long-term annual dividend target of 7p per share a year and has set a target distribution for the year to 31 March 2014 of 7.1p.

"With increasing competition for HICL's favoured asset type, the challenge for the manager is to maintain the fund's risk/return profile, while growing the fund to meet market demand," says an analyst at Winterflood.

But Mr Roper adds that there is value outside the UK, in areas such as Australia, northern Europe and North America. HICL already has three transport-related investments in the Netherlands and Canada, and two Irish investments.

Share price annual returns (%)

Source: Morningstar, *as at 30 September 2013