Infrastructure investment trusts have been highly prized by investors for their low-risk access to predictable, inflation-linked income streams in recent years. As a result these trusts have often traded at extremely high premiums to net asset value (NAV), making them a pricey investment. IC Top 100 Fund , HICL Infrastructure 's (HICL) premium to NAV climbed to an eye-watering 27 per cent in August, for example.
- Inflation-linked income
- Direct exposure to infrastructure
- Good performance record
- Attractive yield
- Premium lower than average
- Premium could fall further
But following the electoral victory of Donald Trump - whose policies are expected to increase inflation - investors have been dumping government bonds, and so called 'bond proxies' such as infrastructure assets have also been hit. As of 5 December, HICL's premium was down to 13.3 per cent, which was below its 12-month average of 16.8 per cent. This means it could be a good time to add it to your portfolio.
But Mr Scouller believes HICL's historically high risk premium should act as a buffer against rising gilt rates to a certain extent, and Stifel has recently upgraded its recommendation on the trust from 'hold' to 'buy', saying HICL now looks attractively valued.
"There remains a very significant cushion in the risk premiums of [about] 6 per cent, used to calculate the discount rates used in valuing infrastructure portfolios," says Mr Scouller. "Therefore, we think UK gilt yields could rise to 3-3.5 per cent before there is a significant negative impact on NAVs from rising discount rates."
HICL also has a solid track record of outperformance. Over one, three and five years its share price has delivered 12, 46 and 78 per cent, respectively, compared with 8, 16 and 53 per cent by the FTSE All-Share index. It also has an attractive dividend yield of 4.6 per cent.
The trust aims to provide investors with sustainable long-term income and preserve capital value, with the potential for capital growth. It invests in a portfolio of infrastructure investments positioned at the lower end of the risk-reward spectrum, such as schools, hospitals and government accommodation. Many of these projects have a public-private partnership (PPP) model and so benefit from government-backed, inflation-linked income. However a lack of supply in PPP assets means the trust has recently started to expand into demand assets such as toll roads and student accommodation.
"Against a potential inflationary backdrop, those investments that can demonstrate some form of inflation protection are likely to perform well," say analysts at Canaccord Genuity. "HICL's inflation delta of 0.7 (implying a 0.7 per cent increase in return for a 1 per cent increase in inflation above 2.75 per cent) should provide an uplift in returns."
The demand for infrastructure assets is expected to rise in the UK after the promise of a £23bn cash injection into the sector by the government in the Autumn Statement. HICL invests predominantly in the UK, which represents 83 per cent of its portfolio of 112 projects, so could benefit from this increased spending. The trust also has some exposure to overseas markets such as the US, where increased infrastructure spending is also on the cards.
HICL's premium could fall further so the trust could become even cheaper. But its strong performance record, infrastructure focus and access to inflation-linked income mean even at this level it's a good option for risk-conscious investors. Buy. EA.
| HICL INFRASTRUCTURE (HICL) | |||
|---|---|---|---|
| PRICE | 162.7p | GEARING | 0% |
| AIC SECTOR | Sector Specialist: Infrastructure | NAV | 143.6p |
| FUND TYPE | Guernsey domiciled investment company | PRICE PREMIUM TO NAV | 13.3% |
| MARKET CAP | £2.4bn | YIELD | 4.6% |
| No OF HOLDINGS | 112* | ONGOING CHARGE | 1.22% |
| SET UP DATE | 29/03/2006 | MORE DETAILS | https://hicl.com/ |
Source: Winterflood as at 5/12/16, *HICL Infrastructure Company as at 16/11/16
Performance
| 1-year share price return (%) | 3-year cumulative share price return (%) | 5-year cumulative share price return (%) | |
|---|---|---|---|
| HICL Infrastructure Co | 12 | 46 | 78 |
General infrastructure sector average | 11 | 44 | 71 |
| FTSE All-Share index | 8 | 16 | 53 |
Source: Winterflood as at 5/12/16
Top 10 holdings as at 30 September 2016
| Southmead Hospital |
| Home Office |
| Pinderfields & Pontefract Hospitals |
| Dutch High Speed Rail Link |
| AquaSure |
| A63 |
| Queen Alexandra Hospital |
| Allenby & Connaught |
| A13 |
| Birmingham Hospital |
Source: HICL Infrastructure Company
Sector breakdown as at 16/11/16 (%)
| Health | 38 |
| Education | 21 |
| Accommodation | 17 |
| Transport | 17 |
| Law and order | 7 |
Source: HICL Infrastructure Company
IC Tip Rating
| Tip Style | Income |
|---|---|
| Risk Rating | Medium |
| Timescale | Long term |
