It has been a grim year for income investors as dividends have been slashed and interest rates around the world have dropped. But one sector that has looked fairly resilient throughout is infrastructure, due to the essential and long-term nature of many of its assets.
Harry Seekings, lead manager of HICL Infrastructure (HICL), the UK’s largest infrastructure investment trust in terms of market capitalisation, says “from a financial perspective, the cash flow and portfolio overall [for HICL] have been very resilient this year”.
The trust paid its dividend in line with expectations this year, despite some assets such as toll roads being hit by pandemic-induced lockdowns, and the directors have said they plan to pay dividends for the financial year to 31 March 2021 in line with what was paid in the previous year.
“The dividend stream has been stable and reliable over the past 14 years,” says Mr Seekings, adding that this is a key part of HICL’s appeal. Although it may in the future, the trust has never reduced its dividend and its shares currently have a dividend yield of 5 per cent, according to Winterflood data.
The trust sits at the lower end of the infrastructure risk spectrum by investing the majority of its assets in public private partnerships (PPP), which made up more than 70 per cent of the fund as at 31 March. These are projects that receive income based on contracts with the government, in areas such as schools, hospitals and roads. Mr Seekings says revenue from these assets has broadly been unaffected this year, owing to the long-term nature of the contracts.
A further 20 per cent of the fund is invested in “demand-based assets”, including toll roads, which have seen a drop in income as their revenues vary in line with usage. Other examples include the trust’s ownership of retail stores in St Pancras and car parking at some train stations, Mr Seekings says, which have suffered a drop in revenue with fewer passengers passing through.
However, the trust is restricted to a maximum of 20 per cent exposure to demand-based assets, which should act as a safeguard for long-term income. Mr Seekings says: “There has been some impact [to revenue in the trust], but I want to emphasise that the impact of those has been mitigated by diversification and the fact that we have a limit on demand-based assets.”
The trust had 117 infrastructure assets as of 31 March, and its shares traded at a premium of 10.9 per cent to net asset value on 14 September. While this may be offputting for investors, Mr Seekings says the trust has always traded at a premium and it demonstrates confidence in the sector. Although the trust has made some disposals in recent years, the managers aim to invest for the long term and the weighted average asset life of the portfolio is over 27 years.
The trust issued a share placing recently to repay money drawn via its revolving credit facility, having made a handful of investments to top up existing holdings in June and July. Mr Seekings says this included adding to an investment in Kent with the Royal School of Military Engineering and buying out a co-investor in a PPP road in Ireland.
Mr Seekings says: “Both of those projects are very much right down the middle of the investment strategy for HICL, both with the availability-based payment streams – that means not exposed to fluctuations in the wider economy – and there’s no usage risk, we just get a nice steady income stream, which is pretty fundamental to the investment proposition.”
The trust currently has most of its assets in the UK, but its exposure to foreign assets has been growing and Mr Seekings expects this trend to continue. The trust currently has assets in Ireland, France, Germany, Holland and North America, with overseas exposure comprising nearly a quarter of the portfolio.
He also expects the fund to increase exposure to more modern areas of infrastructure, such as telecommunications and fibre networks, as these have become an essential service with predictable cash flows. But he says he will only invest in fibre networks when they are past the stage of development risk and have a secure revenue stream from an identified customer base.
A focus on sustainability is central to the trust’s investment process. The trust’s investment manager, InfraRed Capital Partners, worked with the UN-backed Principles for Responsible Investment (PRI) in 2012 to set up guidance for infrastructure and still sits on the PRI infrastructure guidance committee. The trust has also started reporting against the Task Force on Climate-related Financial Disclosures, so it can understand the portfolio’s climate risk and try to ensure the trust holds assets that will preserve value in the future.
Despite infrastructure being a popular asset class, Mr Seekings is not worried about overcrowding in the sector. He says he continues to find appropriate investment opportunities as InfraRed has “a great network of relationships”, which enables the trust to often negotiate transactions off market.
