Previous columns have commented on the extent to which higher interest and discount rates have adversely affected sentiment across a range of alternative asset classes, including the infrastructure sector. The prospect that private finance initiative (PFI) and public-private partnership (PPP) projects will expire over the coming years, together with an erroneous cost disclosure regime inflicted on investment trusts more generally, also weighs on the sector. This has created a perfect storm. Yet there are reasons to believe such concerns are overplayed, and the fundamentals remain sound. As such, wider than average discounts and handsome yields represent an attractive opportunity for patient investors – particularly at this point in the interest rate cycle.
The risks
Rising interest and discount rates have proved a strong headwind to several alternative assets, including infrastructure. Higher interest rates and bond yields are competing for the attention of those investors seeking income. Higher discount rates have raised market concerns about the validity of asset values. Poor sentiment is casting a long shadow. Add in the ill-judged cost disclosure regime that is making investment trusts look unduly expensive (‘When is a cost not a cost?’, IC 29 December 2023), particularly those managing physical long-term assets such as infrastructure, and this in large part accounts for the reason discounts have widened significantly.