3i Infrastructure offers high-yield inflation protection

From an investor's point of view there are broadly two types of infrastructure: economic and social. The former generates income based upon the level of demand, and includes both transport infrastructure, such as ports, railways and toll roads, and public utilities such as water and electricity distribution.

Social infrastructure meanwhile involves investment through public private partnerships (PPP) or private finance initiatives (PFI). Common investments are schools, hospitals and prisons, where revenues are based not upon usage but upon provision and service levels.

The attractions of social infrastructure investments are plentiful: contracts are mostly backed by governments, cash flows are high and paid regularly, and as long-term loans are put in place at the outset, and typically mature after 20 to 30 years, there is little interim concern about financing. While the costs of these projects are fixed at the outset, the revenues from them are inflation-linked - typically to the retail prices index (RPI).

There are a number of players within the investment trust space investing in social infrastructure: HSBC Infrastructure and Gravis Infrastructure Investments, which focus almost exclusively on the UK, International Public Partnerships (IPP) and 3i Infrastructure, which include overseas projects in their portfolio, and the recently launched John Laing Infrastructure fund.

Of these five listed players, 3i Infrastructure is looking particularly attractive. Having recently announced its annual results, the fund has delivered strong income generation over the past year and has benefited from inflation being higher - RPI inflation of 5.3 per cent has added an additional £7m to the fund's net asset value (NAV).

The fund's final dividend of 2.86p represents growth over the year of 4 per cent with the dividend payment fully covered by revenues.

According to figures from Winterflood Investment Trusts, the fund's diluted NAV was up 3.4 per cent over the year to 117.4p. With dividends included, this equates to a 9.2 per cent total return on shareholders' money.

3i Infrastructure has a portfolio of 17 assets valued at £822m. The managers split investment into three categories: 1) social infrastructure which includes PPP and PFI projects; 2) 'core' infrastructure which includes regulated utilities and transport; and 3) 'hybrid' infrastructure - higher-risk investments with country or political risk. Currently around 13.1 per cent of the fund is invested in social infrastructure, 56.8 per cent in core infrastructure and 13.5 per cent in hybrid infrastructure.

The fund has enjoyed a high level of activity in the past year, making some significant investments in the second half of the financial year, including a £151m investment in train leasing business Eversholt Rail Group and a £15m investment into Indian power development company GVK Energy through the 3i India Infrastructure Fund. Investing the fund's remaining cash is a key focus of management for the next year.

While the fund is considered a low-risk option, investors should be wary of currency volatility - Indian Rupee exposure within the fund is currently unhedged given the high costs although around 80 per cent of the fund's euro exposure is hedged.

3i Infrastructure has moved to a premium of 1.7 per cent; however, this is still markedly lower than any of the other listed infrastructure funds, which are trading on premiums of between 5 per cent and 9 per cent to NAV. With UK investors hungry for high-yield inflation protection, the fund's potential for significant capital protection and its yield of close to 5 per cent is exceptionally attractive in an environment of low rates. Buy.

Key fund data:

Source: Investors Chronicle companies data & Winterflood Investment Trusts

Notes: Performance figures as at 9 May 2011

Top 10 holdings as at 31 March 2011

Geographical Allocation