While such speculation can often fail to materialise, one measure being widely touted ahead of Budget day is especially interesting – if only because it would serve as an Achilles' heel for one of the more dependable investment trust cohorts.
Many infrastructure investment trust shares continue to trade at a chunky premium to net asset value (NAV) for good reason. The sector has been pretty resilient in the past year and trusts have kept generating some very juicy payouts – even as equity dividend cuts and collapsing bond yields punish income investors elsewhere.
So far, so good. But as we have sometimes discussed, so-called “alternative” assets tend to have their own vulnerabilities. Take concerns about the valuations on music catalogues held by Hipgnosis Songs Fund (SONG) or the pandemic struggles of the aircraft leasing trusts. Infrastructure trusts may now have their own weak spot. Stifel analysts recently observed that one measure expected from the chancellor – a rise in corporation tax – would cause serious pain for the infrastructure crowd.
While some capital profits generated by the funds are tax-exempt, the profits earned by each portfolio holding, such as a private finance initiative (PFI) or renewable project, are subject to the tax. Most of the funds value their portfolios based on enacted tax rates.
Some names look particularly vulnerable. Stifel calculates that, were corporation tax to rise from 19 to 24 per cent, renewables name Greencoat UK Wind (UKW) would take a 4.3 per cent hit to NAV, with Bluefield Solar Income Fund (BSIF) suffering to the tune of 3.3 per cent. International Public Partnerships (INPP) would take a 3.2 per cent hit, with an impact of 3 per cent for JLEN Environmental Assets Group (JLEN). This is based on such a tax hike occurring in the UK alone: Stifel suggests that if other countries were to follow suit, BBGI Global Infrastructure (BBGI) and INPP could take hits of more than 4 per cent.
What does this mean? It reminds us that, solid as they are, infrastructure trusts are not bulletproof. Any damage to NAVs could hurt share prices, with high premiums leaving us a long way to fall. To give an extreme example, BBGI shares traded at an eye-watering 34.6 per premium to NAV on 25 February.
This, of course, isn’t the first scare infrastructure fans have had. Names such as HICL Infrastructure (HICL) took a share price hit in 2017 when then shadow chancellor John McDonnell promised to crack down on PFI projects, something that has provided so much stable portfolio income over the years. Renewable energy names have their own issues to deal with, including the effect fluctuations in power prices can sometimes have on returns.
There is no suggestion that a tax shock would wipe out the income that has made these names so attractive. But investors should remember that no alternative asset is invincible – remember the individual risks and decide your fund picks (and position size) accordingly. Diversification can’t hurt, either.
