Sell International Public Partnerships as "exorbitant" fees emerge

The fund is a specialist infrastructure company made up of 121 individual investments in the UK, Australia, Canada, Germany, France, Belgium, Italy and Ireland. It holds everything from schools, hospitals, courthouses and police stations, to transport infrastructure, rolling stock and energy transmission projects. Over five years, it's beaten its benchmark (50 per cent FTSE 250 and 50 per cent FTSE All-Share) and is the top performer in its peer group.

But, more recently, it has slipped behind. And it has emerged that the manager has taken total incentive fees of £26m, despite a 4.4 per cent annualised underperformance of the benchmark index since inception - an arrangemnent that is "fundamentally flawed", according to Alan Brierley, head of closed-ended funds at Cannacord Genuity. Mr Brierley describes the performance fees, which works out at around 3 per cent of the fund's net asset value (NAV), as "driven by greed", but says the contract was put in place years ago when the financial world was a "different place".

But, following pressure from shareholders, the company has come up with a new fee arrangement. This involves the removal of the incentive fee structure going forward, but as a quid pro quo, the manager will see the contract extended by another seven years to 15 years.

Mr Brierley says: "Shareholders are now between a rock and a hard place. Either they vote for removal of the incentive fee and lock into a 15-year contract, or they move forward with the existing fee arrangements and run the real risk of paying some exorbitant fees if gilt yields rise, which they are likely to do at some point in the next eight years. Given recent falls in the share price, it's interesting to see some shareholders have decided to vote with their feet."

The board told Cannacord Genuity that removing the performance fee brings INPP in line with its peer group - however, the length of the contract is still much longer than HICL Infrastructure Company (HICL), the largest listed infrastructure stock, which has a notice period of just one year.

Commenting on the changes, Giles Frost, director of INPP, said “The abolition of any future performance fees, along with an accompanying reduction in base fees, is clearly an improvement for shareholders and must therefore be welcome. The historic performance fee figures relate to an aggregate over the company’s life; and thirdly when Mr. Brierley implies that investors are locked into a 15 year arrangement, it ignores the fact that shareholders are free to buy and sell shares at any time and also that that contract is capable of earlier termination – particularly in the case of poor performance.”

Even if you are happy with the new management structure, INPP is trading on a significant premium of 5 per cent to its NAV, leading Oriel Securities to recommend that investors reduce their holdings. So if you're holding this fund but you want to sell it, what could you buy to fill the hole in your portfolio?

HICL Infrastructure Company, a member of our Top 100 Funds, is a strong play, but it is trading on an 11.5 per cent premium, which means now is not a good time to be buying it.

First State's Global Listed Infrastructure fund (ISIN: GB00B24HJC53) is also in our Top 100 Funds and is a good alternative. It's underperformed the benchmark (UBS Global Infrastructure & Utilities 50-50 Index) over the past year, but it's beaten it over three and five years, and produced more than twice the cumulative return since its inception. It also produces a decent yield of 3.3 per cent and has a 1.62 per cent ongoing charge. Core holdings include Vinci (5.4 per cent), National Grid (5.0 per cent) and Transurban Group (4.9 per cent).

International Public Partnerships (INPP) Key facts (as of June 30th 2013)