- As the infrastructure investment trust sector grows, it is important to understand what they invest in and how risky they are
- Many trade at premia to NAV so look out for when they offer their shares at a better price in secondary fundraisings
There are around 30 infrastructure investment trusts listed in London, nearly half of which – 13 – have listed in the past three years. Only five have been around for more than a decade, with seven listing in the past 12 months, raising a total of £1.33bn, according to the Association of Investment Companies (AIC). 17 trusts, meanwhile, have issued a secondary fundraising in the past year raising £2.74bn in total.
Many of these trusts invest in renewable energy assets or social causes, and most of them offer very attractive yields. Wealth managers suggest that you could invest up to 5 per cent of your assets in infrastructure investment trusts, but the sector is becoming increasingly nuanced so it’s important to think carefully about which trust you invest in. And these trusts' popularity means that many of them trade at significant premiums to net asset value (NAV). So if you do invest in them, look out for when they do secondary fundraisings, when their shares can be bought at a better price.
Infrastructure trusts' returns have consistently high inflation linkage because long-term projects often have inflation factored into the contracts. But look at what discount rate is applied to projects for the calculation of a trust’s NAV because the higher the discount rate, the higher the risk. You should be able to find this information in a trust’s annual report. However, newer trusts with a high discount rate may benefit as they mature, as a declining discount rate should increase their NAVs over time – provided they are successful.
The AIC splits infrastructure trusts into three major categories: infrastructure, renewable energy infrastructure and infrastructure securities. But broker Winterflood breaks them down into many sub-sectors, as follows.
Infrastructure – social
Winterflood puts three trusts into this category including two of the oldest – HICL Infrastructure (HICL) and International Public Partnerships (INPP), which launched in 2006. The bulk of their portfolios are in social projects. Some 29 per cent of HICL was invested in healthcare, 29 per cent in transport and 16 per cent in education projects, as of 31 March. International Public Partnerships is also well-diversified with 22 per cent invested in energy transmission, 19 per cent in each of transport and education, and 17 per cent in gas distribution projects, as of 31 December 2020.
Mick Gilligan, head of managed portfolio services at wealth manager Killik, says that these two are “typically the lowest risk” of the infrastructure trusts and he holds both in client portfolios. He adds that HICL has an inflation sensitivity of 80 per cent and International Public Partnerships one of 78 per cent, which is pretty attractive.
BBGI Global Infrastructure (BBGI) launched in 2011 and is a well-diversified, lower-risk option that considers environmental, social and governance factors in its investment approach. However, the trust was trading at a premium to NAV of 31.3 per cent as of 1 July, while HICL was on a 10.2 per cent premium and International Public Partnerships on a 10.8 per cent premium.
Infrastructure – renewable energy
Winterflood counts 13 trusts in this sub-sector, four of which have launched in the past year. Some invest in solar assets, some in wind and some in a combination of renewable energy sources. The weighted average yield of the sector was 5.3 per cent, as of 2 July. Many of these trusts – including JLEN Environmental Assets (JLEN), Aquila European Renewables Income (AERS), Renewables Infrastructure Group (TRIG) and Greencoat Renewables (GRP), trade on double-digit premiums to NAV. Greencoat UK Wind (UKW) and Renewables Infrastructure, which launched in 2013, are the oldest and largest trusts in the sector with assets of £3.55bn and £3.87bn, respectively. They have yields of over 5 per cent.
Renewable energy infrastructure trusts are vulnerable to falls in power prices. Gilligan says Killik has recently sold renewable energy infrastructure trusts out of client portfolios because their NAVs are calculated on the assumption that power prices will rise. Broker Stifel recently analysed 10 of these trusts and only maintained a positive rating on one – NextEnergy Solar Fund (NESF). It placed a neutral rating on six trusts and a negative rating on JLEN Environmental Assets, Greencoat Renewables and Bluefield Solar Income Fund (BSIF).
Infrastructure - battery storage
Two trusts focus on battery storage plants – Gresham House Energy Storage Fund (GRID) and Gore Street Energy Storage Fund (GSF). These launched in 2018 and make the majority of their revenues by managing short-term imbalances in supply and demand in the grid, known as frequency response.
Energy storage funds are not as sensitive to power prices as conventional renewable energy infrastructure trusts. The discount rates applied to the trusts are quite high but have been coming down, which has led to growth in their NAVs over the past year. But they were trading on low double-digit premiums in early July. See The attraction of energy storage income (IC, 21.05.21) for more on these.
Infrastructure – economic
Cordiant Digital Infrastructure (CORD) and Digital 9 Infrastructure (DGI9) listed on the Specialist Fund Segment of the London Stock Exchange earlier this year raising £370m and £300m, respectively. They aim to provide a reliable income by investing in infrastructure assets that support the internet, such as data centres, fibre-optic networks and mobile towers.
3i Infrastructure (3IN), which launched in 2007, is a more established and diversified way to access the growth of the digital economy. As of 31 March, it had 10 investments in what it describes as “economic infrastructure businesses” alongside six others. In early July, it had assets of £1.93bn, a yield of 3.3 per cent and was trading at a premium of 12.9 per cent, according to Winterflood.
Infrastructure – energy efficiency
The oldest of the three trusts in this sub-sector, SDCL Energy Efficiency Income Trust (SEIT), launched in December 2018 and has assets worth £913m. It invests in 34 energy efficiency projects across the UK, US and Europe, and the trust says that its investments saved 44,500 MWh of energy over the year to 31 March 2020. SDCL Energy Efficiency Income yields 4.7 per cent and trades at a premium to NAV of around 15 per cent.
Triple Point Energy Efficiency Infrastructure Company (TEEC) listed in October last year and is targeting UK-based projects focused on areas such as low-carbon heat and social housing energy efficiency. So far, it has invested about a third of its assets. Aquila Energy Efficiency Trust (AEET) listed last month having raised £100m, and is targeting total returns of 7.5 to 9.5 per cent a year.
Infrastructure – debt
The two trusts in this sub-sector aim to provide regular, sustained, long-term distributions by investing in infrastructure debt. GCP Infrastructure Investments (GCP) has been trading for more than 10 years and has been adversely hit by falling power prices as most of its assets are in UK-based renewable energy. Its yield of about 7 per cent is one of the highest in the wider sector, implying that there may be elevated risk within its projects.
Sequoia Economic Infrastructure Income Fund (SEQI) has made significantly better share price total returns in recent years, although currently has a lower yield of 5.6 per cent. It invests in private debt and bonds across 12 jurisdictions in a range of sub-sectors.
Infrastructure - securities
Two trusts invest in the shares of utility and infrastructure companies. Ecofin Global Utilities and Infrastructure Trust (EGL), the larger of the two, is well-diversified across sectors and geographies. Premier Miton Global Renewables Trust (PMGR) is very small with assets of only £45m, meaning that its shares have low liquidity. If you want to invest in infrastructure equities, there are also open-ended funds, as Dave Baxter explained in Capitalising on the infrastructure spending spree (IC, 18 December 2020).