Foreword
By Annabel Brodie-Smith
Last time we talked the open-ended fund, Woodford Equity Income, had just suspended. Over a month later, the fund is still suspended and is continuing to dominate the headlines. The Treasury Select Committee has questioned Andrew Bailey, Chief Executive of the FCA on the events that led to the suspension and the FCA are now running an investigation on this. The committee wrote to Hargreaves Lansdown and received information from them as to why they had included Woodford Equity Income in their Wealth 50 list.
Particularly pertinent were Bank of England boss, Mark Carney’s, comments that open-ended funds that invested in hard-to-sell assets were “built on a lie.” Yesterday, the Bank of England announced that it was concerned that open-ended funds investing in hard-to-sell assets could have a widespread impact on the financial system. They are considering rule changes for this type of open-ended fund along with the FCA. Which brings me again to the highly important structural difference between open-ended funds and investment companies. Sorry to harp on about this but as you can see it's crucial.
Investment companies, with a closed-ended structure, are particularly suitable for investing in hard-to-sell (illiquid) assets like unquoted companies and property. This is because investment company shares are bought and sold on the stock exchange so managers do not have to worry about money coming in or leaving the fund. The managers can focus solely on the long-term performance of the investment company. If there is negative news, the investment company’s share price will fall but the portfolio will be unaffected. Investors may not like the share price but they can sell their shares if they wish to.
Open-ended funds do not work well for hard to sell assets. This is exemplified by Woodford Equity Income, which should have had only 10% of these assets in its portfolio but was still forced to suspend. Open-ended fund managers have to manage their portfolios to accommodate inflows and outflows, ensuring they have enough money available to give investors back their money. When sentiment is negative, open-ended fund managers cannot sell the illiquid assets quickly enough to meet investor redemptions, despite retaining a cash cushion for these situations. An open-ended fund is forced to suspend trading so investors cannot buy or sell. This inevitably brings bad publicity to the open-ended fund which is not helpful when it opens to trading again.
Which brings me to investment companies which invest in infrastructure projects, an asset which, of course, is hard to buy and sell, and so ideally suited for the investment company structure. The Infrastructure and Renewable Energy Infrastructure investment company sectors have grown over 700%, in the last ten years and that looks set to continue. These sectors received £1.4bn of the record £4bn raised by existing investment companies in the first six months of the year. Watch our video below where I talk to Giles Frost from INPP, Philip Kent manager of GCP and Frank Schramm, co-CEO of BBGI about the benefits of investing in infrastructure. Also take a look at our article where we include the views of HICL’s, Harry Seekings.
Infrastructure investment company managers Giles Frost – INPP, Philip Kent – GCP and Frank Schramm – BBGI, discuss the benefits of investing in infrastructure.
Moving on, our investment expert, Ian Cowie, spills the beans on how he has selected investment company shares for his personal portfolio “over the last quarter century or so.” He digs into the detail of share price performance, discounts and premiums, looking under the bonnet of reports and accounts, factsheets and income. As Ian says: "Either way, a well-informed investor should make better decisions. The more you look, the more you will see.”
We are also taking a look at the longest-serving investment company managers and it’s positive news that half of investment companies have been managed by the same person for 10 years or more. Some have been at the helm for far longer with the legendary Peter Spiller as the longest serving manager with a 37-year record at Capital Gearing. I often bump into him on his way into the office early at Lancaster Gate tube - I think he’s got more energy than me! Following hot on his heels is Simon Knott, manager of Rights & Issues for 35 years, Hugh Young, who has helped manage Aberdeen New Dawn since its launch 30 years ago and James Henderson, manager of Lowland for over 29 years.
Finally, you may be interested in the MoneyWeek Wealth Summit taking place in London on November 22nd. An interesting group of high-profile speakers will be presenting – Jim Mellon, James Anderson (Scottish Mortgage), David Stevenson, Russell Napier and Sir Steve Webb (Royal London). For further details including ticket prices click here.
Not long until the lazy days of August kick in (I hope). My children are already living the life of Riley and are off to Toronto next week to stay with their aunt and family for two weeks. I am working away until mid-August when I have nothing planned for two weeks – bliss... Hopefully, the weather will stay sunny and the beach will come to the River Thames and Oxfordshire.
Compass will be back in September. Wishing you a wonderful summer.
Annabel Brodie-Smith
Communications Director, AIC
From pipes to politics
Managers look at the benefits and political risk associated with infrastructure investment
Over the last ten years the Infrastructure and Renewable Energy Infrastructure investment company sectors have grown by over 700%, from £2.04bn of assets (4 companies) in June 2009 to over £16.7bn of assets (17 companies) at the end of May 2019, demonstrating strong demand. However, over the last two years, the political debate about the funding of infrastructure has intensified, with no new projects to be implemented under the Private Finance Initiative (PFI) and Labour’s nationalisation policies gaining media coverage.
To better understand how the sector's portfolio managers navigate its opportunities and risks, we have quizzed Frank Schramm, co-CEO of BBGI S.A., Giles Frost, manager of International Public Partnerships, Philip Kent, manager of GCP Infrastructure Investments, and Harry Seekings, co-head of infrastructure at InfraRed Capital Partners which manages HICL Infrastructure. Their answers are collated below.
Can you explain your investment strategy?
Frank Schramm, co-CEO of BBGI S.A., said: “We often joke that boring is beautiful and we have a ‘boring’ investment strategy which has worked well for us since going public in 2011. It has allowed us to deliver compounded returns in excess of 11% per annum. We have a low risk, long-term investment policy and, as a globally diversified infrastructure investment company, we provide responsible capital to build and maintain transport and social infrastructure. Our typical investments include roads, schools, hospitals and justice facilities and we are typically paid by highly rated government counterparties for delivering and maintaining important infrastructure. An example of one of our projects is the Ohio River Bridge Project in Indiana/Kentucky, US. Together with the government and our partners, we have delivered a new 760m long cable-stay bridge, 500m twin vehicular tunnel and associated road network that has reduced travel times and improved the flow of goods and people in the region.”
Giles Frost, manager of International Public Partnerships (INPP), said: “INPP provides responsible investment in public infrastructure to support the delivery of essential public services. Whether the infrastructure required is for schools, court buildings, power transmission, transport or wastewater, our purpose is to support the needs of society and the environment for both today and tomorrow. Our horizons are long-term, where we seek to generate highly predictable portfolio performance by investing in a combination of low-risk infrastructure assets which produce long-dated, contractual cashflows. In turn, this allows us to provide our investors with long-term, inflation-linked returns either to provide reliable long-term income or an effective liability match.”
Philip Kent, manager of GCP Infrastructure Investments, said: “GCP Infrastructure seeks to provide investors with regular, sustained, long-term dividends and to preserve capital over the long term through exposure to a diversified portfolio of UK infrastructure debt and similar assets. It primarily targets investments in infrastructure projects with long-term, public sector-backed, availability-based revenue projects across the renewable energy, PFI and supported living sectors. A recent example includes the company’s £80m investment in Race Bank, an operational 573MW offshore wind farm located off the coast of Norfolk. Race Bank’s 91 turbines are forecast to provide enough renewable energy to power over half a million UK homes.”
Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “HICL invests in infrastructure assets at the lower end of the risk spectrum – often referred to as ‘core infrastructure’. These assets are usually located at the heart of local communities, they have monopolistic features and facilitate the delivery of public services. HICL’s three key market segments are: Public-Private Partnerships (PPPs), where there is a contract with public sector counterparties to provide social infrastructure (e.g. a school or a hospital) in return for a long-term, steady and contracted revenue stream; demand-based assets where revenues vary with volume or usage, the best example being a toll road; and regulated assets, where returns to investors are set by an independent regulator, for example a water company.”
What are the benefits of infrastructure investment companies?
Philip Kent, manager of GCP Infrastructure Investments, said: “The closed-ended structure of a listed investment company offers investors daily liquidity in shares exposed to highly illiquid direct investments in infrastructure projects that offer dependable, long-term income. Unlike open-ended funds which need to sell assets or retain cash balances to satisfy selling investors, investors buy and sell investment companies through a live price on the London Stock Exchange. This enables managers to take a long-term view to investing in infrastructure projects, opening the door to greater choice and portfolio diversification whilst substantially reducing portfolio churn.”
Infrastructure investment company managers Giles Frost – INPP, Philip Kent – GCP and Frank Schramm – BBGI, discuss investment strategies, political risks and their outlook for the sector.
Giles Frost, manager of International Public Partnerships (INPP), said: “The type of infrastructure assets INPP invests in are typically very hard to access without the specialist expertise provided by our investment adviser. We originate new investment opportunities ourselves and don’t just rely on government-led procurement to grow our portfolio for us. This means direct infrastructure investment has a high barrier to entry, even for the most sophisticated institutional investors. What listed investment trusts like INPP afford investors is the means to easily access the asset class in a simple, tradable share structure like any other FTSE security. Since listing INPP thirteen years ago, we have seen a democratisation of alternatives allocation as a result.”
“The closed-ended structure of a listed investment company offers investors daily liquidity in shares exposed to highly illiquid direct investments in infrastructure projects that offer dependable, long-term income."
Philip Kent, manager of GCP Infrastructure Investments
What are the positive social and economic impacts of your investments?
Frank Schramm, co-CEO of BBGI S.A., said: “Infrastructure projects can have an immense impact on the local communities and the environment. During the construction of the Mersey Gateway Bridge in the UK, BBGI’s project team established a volunteer scheme including a four-week training programme where people could learn a range of personal development skills. After completion of the course, the volunteers were offered the opportunity to support the project’s visitor centre and help to tell the story of the project to local schools and community groups. The projected long-term economic benefits are expected to include over 4,000 permanent new jobs, regeneration activity and inward investment of over £61m a year in gross value added from new jobs by 2030.”
Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “Economically, the benefits of private capital invested in public infrastructure include risk transfer through construction and/or the operational phase, ring-fenced capital maintenance budgets, and the application of private sector expertise and resource. The benefit to taxpayers of risk transfer, in particular, is significant as it incentivises the private sector to deliver capital programmes within budget and on time; and to keep assets well maintained and operating efficiently.
“Through portfolio companies, HICL invests in physical assets, which are often high-profile and located at the heart of communities, and which support the delivery of public services. Investors in infrastructure must be aware of, and sensitive to, the interests of all the stakeholders. This mindset helps to create long-term, sustainable value for HICL’s shareholders. A recent example of this responsible approach to stakeholder management was the resolution of the issues arising from the Carillion liquidation, which demonstrated the sustainability of the Public-Private Partnership model.”
Philip Kent, manager of GCP Infrastructure Investments, said: “Infrastructure, by definition, includes the provision of assets that serve a public benefit. All infrastructure therefore has direct user benefits, such as improved provision of services such as healthcare or education, reduced journey times associated with transport infrastructure and reduced carbon emissions from renewable energy generation. Further, infrastructure projects also have indirect or dynamic benefits – typically associated with larger projects. GCP Infrastructure invests in renewable, PFI and supported living assets in the UK. By way of illustration, the company has facilitated the operation and/or construction of renewable energy facilities with a total combined output of c.2,500GWh per annum, enough to power nearly 1 million UK homes. Renewable energy projects comprise 60% of GCP Infrastructure’s investment portfolio.”
Giles Frost, manager of International Public Partnerships (INPP), said: “Infrastructure investment is a customer service business. The assets in which we invest have an impact on the daily lives of many people across the world and it is this responsibility we take very seriously. Last year, we held more than 3,000 hours of management meetings with our public sector clients to ensure the smooth operation of our assets, including those schools in our portfolio which provide educational facilities to over 190,000 pupils. We believe in engaged societies and our portfolio provided space for more than 150,000 hours of community use.”
“Infrastructure investment is a customer service business. The assets in which we invest have an impact on the daily lives of many people across the world and it is this responsibility we take very seriously."
Giles Frost, manager of International Public Partnerships (INPP)
What’s your outlook for the infrastructure sector – risks and opportunities?
Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “Political risk is inherent in the business model of infrastructure investment due to the essential nature of the assets and the counterparties involved. Particularly pertinent for the sector is the evolution of thinking on infrastructure financing. InfraRed has contributed to public consultations on the future for delivering infrastructure investment, and is taking a proactive approach to engaging with policy-makers on the benefits to taxpayers that responsibly managed private investment can deliver.”
Frank Schramm, co-CEO of BBGI S.A., said: “Our investment activities involve sourcing and originating, bidding for and winning social infrastructure and other availability-based infrastructure projects. The overall pipeline for availability-style transactions remains generally strong. We will maintain our selective acquisition strategy in assessing any potential new assets and remain confident in our ability to originate investment opportunities. We anticipate these will come from a variety of sources, including a North American strategic partnership, which has already resulted in the acquisition of five operational social infrastructure assets amounting to approximately C$191m.”
Philip Kent, manager of GCP Infrastructure Investments, said: “As infrastructure development is closely tied to government policy that promotes such development (and often relies on the existence of specific government support), political risks are inherent in an infrastructure investment. Political risks span macro risks associated with being exposed to a specific geography and the legislation governing that location, such as corporation tax rates and building regulations. Further, given the direct nature of government support, any changes to support arrangements that are more targeted at a project or sector can have a material impact on the value of infrastructure investments.”
“Political risk is inherent in the business model of infrastructure investment due to the essential nature of the assets and the counterparties involved. Particularly pertinent for the sector is the evolution of thinking on infrastructure financing."
Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL
All in good time
The longest-serving investment company managers revealed
Theresa May announced her resignation as Conservative Party leader on 7 June having been appointed nearly three years before. However, 21 British Prime Ministers had even shorter tenures, including Gordon Brown, Neville Chamberlain and George Canning, who was Prime Minister for just four months in 1827. With a change of leader expected, the AIC has examined the tenure of investment company managers. It finds that half of investment companies have been managed by the same person for 10 years or more.
Out of all AIC member investment companies (ex VCTs) with a track record of 10 years or more, 94 companies (50%) have been managed by at least one of their current fund managers for 10 years or longer. Whilst this is impressive, several managers have track records stretching back much further than that: 19 companies (10%) have been managed by the same manager for over 20 years.
Longest-serving managers
The investment company industry’s longest-serving manager is Peter Spiller, who has managed Capital Gearing for over 37 years. Following close behind is Simon Knott, manager of Rights & Issues for 35 years. Next longest-serving is Hugh Young, who has helped manage Aberdeen New Dawn since its launch 30 years ago. Hot on their heels are James Henderson, manager of Lowland for over 29 years and Richard Newbery and Alistair Whyte, managers of Aberforth Smaller Companies for over 28 years.
Quotes from Peter Spiller, Hugh Young and James Henderson on the lessons they’ve learned and their proudest moments follow below, as well as a table of the top longest-serving managers.
For a complete list of the managers who have managed their investment companies for more than 10 years, click here.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies, said: “Investors are often told they should be thinking long-term, so it’s reassuring to see that so many investment companies have managers with impressively long records. Half of AIC members have had the same manager for at least ten years, and many have had the same manager for much longer. With markets always unpredictable, it’s reassuring for investors that many investment company managers have steered their company through different conditions, experiencing good times and bad.
“Since last year, we’ve seen an additional 13 fund managers celebrate a 10-year anniversary of managing their investment company. With the structural benefits of investment companies, such as not having to deal with inflows and outflows, it’s easy to see why managers might enjoy working on investment companies for long periods.”
Most important lesson learned
Peter Spiller, Manager of Capital Gearing, said: “It is hard to pinpoint a single lesson that will endure: politics, markets, and economies are continuously evolving. No one rule, no one approach, can hope to serve you well over the long term. You must learn to adapt.
“Nevertheless, the old stock market saying – that equities climb by the stairs but go down by the elevator – is very true. It is important for managers never to become complacent after a long period of steady gains.
“The unsustainable will not be sustained but it can take surprisingly long for the inevitable to happen. Excessive debt, high valuations and negative interest rates are all things that, for the time being, meet this description.”
Peter Spiller
James Henderson, Co-manager of Lowland Investment Company, said: “A key feature of the investment trust structure is the independent board of directors and one of the most important things I’ve learned over my career is the value of the board. The role of the board is to act on behalf of shareholders’ interests, but I’ve also found working with the board to be incredibly beneficial to how I manage money. Over my tenure managing Lowland Investment Company, I have worked with four different chairmen who have each brought their own unique insights to the trust and, at times, tested me as a manager to ensure we get the best for shareholders. Their investment insights and support in the good times – as well as the bad – adds real value.”
Hugh Young, Investment Manager on Aberdeen New Dawn, said: “I’ve been fortunate to be involved with the management of New Dawn since launch, but its success has been truly a team effort. Members of the current team have been involved with the trust for almost 20 years and longer. The longevity and tenure of the team when combined with new people joining, has been crucial. We’ve learnt lessons from past experiences whilst new members of the team have brought fresh perspectives. I hope that the young talent we have coming through in Asia means that the trust will continue to benefit from a mix of young and old heads over the next 30 years.”
Hugh Young
Best moment as a manager
James Henderson, Co-manager of Lowland Investment Company, said: “I remember this quite clearly, as it was only a couple of years after I was appointed manager of Lowland. It was in 1992 when the UK left the ERM (Exchange Rate Mechanism). Some might think this a strange moment to pick as one of the best moments, but before we left the ERM businesses in the UK were struggling with high interest rates and sterling and our exit caused interest rates to be cut and sterling to fall, which boosted the UK economy. Throughout this whole period we stuck with the UK and our domestic investments, which was the right thing to do because the boost in the UK economy following our ERM exit gave a real boost to our portfolio. Ironically, we’re now living through a time where the opposite seems to be occurring and trying to break away from the EU is causing suffering to the UK economy, but if we don’t have a hard Brexit there is substantial upside in UK equities.”
James Henderson
Peter Spiller, Manager of Capital Gearing, said: “I had a moment of satisfaction when, earlier this summer, the share price of Capital Gearing reached £42.50 which was exactly 200 times the share price when I took over managing the trust in 1982.”
What keeps you motivated?
James Henderson, Co-manager of Lowland Investment Company, said: “I think it’s important to be aligned with shareholders. When I was appointed manager of Lowland in 1990, I bought shares in the company at £1.70 a share and I’ve added to my personal holding a few times since then. Lowland’s current share price is around £13.50 and in our most recent half-year report the board announced it intends to pay total dividends of around 59p for the year. I not only manage the portfolio for Lowland but have ‘skin in the game’ too, so I understand the importance of continuing to grow both capital and income and am motivated to keep achieving this for our shareholders over the long term.”
Peter Spiller, Manager of Capital Gearing, said: “The extraordinary, not to say, distorted nature of the world economy is an endless source of fascination.”
Longest-serving managers over 20 years (AIC members, ex VCTs) at end June 2019 - Source: Morningstar.
Portfolio picking
Ian Cowie explains how he chooses investment companies for his portfolio
Ian Cowie
Investors enjoy a wide choice of different ways to seek income or growth or a mixture of both. Investment companies have a longer history than any other type of pooled fund in helping individual investors share the cost of professional asset management, aiming to minimise the risks of stock markets and maximise returns.
But, with 399 investment companies to choose from, such a wide choice can sometimes feel like too much of a good thing. Here’s how I have selected investment company shares for my personal portfolio over the last quarter-century or so, which may help you - with or without professional advice - to identify companies to meet your individual needs.
Spread risk. Because share prices can fall without warning, it is important not to have too many eggs in too few baskets. So investors should always aim to diminish the danger of stock market shocks by holding a diversified range of investment companies in different commercial and geographical sectors, ideally with different investment objectives - such as the pursuit of income or capital growth or a mixture of both. That way, they shouldn’t all go up or down at the same time.
Consider consistency. Analysis stretching back more than a century shows that the longer you remain invested in shares, the more likely you are to obtain satisfactory results. That’s why it is often said you should only invest money in the stock market that you can afford to commit for five years or more. The AIC's website page headed ‘Find and compare investment companies’ shows share price total returns for member investment companies over the last year, five years and 10 years. As a medium to long-term investor, I would always place more importance on the two longer periods.
Seek value. Short-term or one-year returns information can also be useful because it may indicate when a share or sector is out-of-favour or, alternatively, ‘flavour of the month’. The former may offer better value than the latter. Similarly, quality newspapers’ share price pages will show you the 52-week high and low for each share price, which can give an indication of whether buyers today are following fashion or, possibly, ahead of the herd.
Bag bargains. Most pooled funds charge investors a few percentage points more than their underlying assets are worth but most investment companies do not do so. Discounts - or the percentage by which most investment company share prices trade below their net asset value (NAV) - are also shown on the AIC website. These may indicate whether shares are expensive or might offer bargains for the brave. Discounts can widen as well as narrow and are no guarantee of value. Premiums - or premia - where shares trade above NAV, may be justified by above-average income, growth or a mixture of both. Either way, your entry point - or the price you pay - is important to investment returns.
Look under the bonnet. Annual reports and fund managers’ fact sheets can also be seen on the AIC website and offer a wealth of important information for investors. This includes details of the underlying assets for each company - often under the heading ‘Top 10 holdings’ - enabling prospective investors to consider whether we agree with the fund manager’s stock selection.
Increasing income. Quality newspapers’ share price pages show the yield - or dividends paid to investors, expressed as a percentage of the current share price. The AIC website goes an important step further for income-seekers. The column headed “5yr dividend growth (%) p.a.” shows the annual rate of increase in income payments to shareholders over that period. No fewer than 20 investment companies have succeeded in increasing dividends every year for two decades or more - some have done so for more than 50 years. You can find all of them on the AIC website by searching for ‘dividend heroes’. No other form of pooled fund can show such consistently increasing income distributions.
These are the major factors I always take into account, along with reading the financial news every day, when selecting investment company shares. But many investors I admire would point to other factors, such as the length of time individual fund managers have been at the helm - this information is also available on the AIC website - or even the average price/earnings ratio or P/E of the shares in each company’s underlying portfolio, which is sometimes shown in annual reports and fact sheets. A low P/E might suggest a share is cheap, whereas a high P/E could indicate it is expensive.
Either way, a well-informed investor should make better decisions. The more you look, the more you will see.
