Infrastructure speeds ahead
Inflation-linked returns protect your income
Infrastructure investment trusts have had a storming year, returning 21% over the past 12 months after a challenging couple of years. The government is facing a funding shortfall of almost £260 billion for essential infrastructure projects according to the Public Private Partnership Commission. Managers say this could provide a pipeline of profitable opportunities for investment trusts, which could boost returns for shareholders.
Annabel Brodie-Smith, Director of the Association of Investment Companies (AIC), said: “Investment trusts have a proven record of managing crucial infrastructure. These investment trusts can deliver inflation-linked income for investors, often backed by long-term government contracts. With inflation rising due to the Iran conflict, investors should consider infrastructure investment trusts which provide some protection from the corrosive effect on their returns.”
“With inflation rising due to the Iran conflict, investors should consider infrastructure investment trusts which provide some protection from the corrosive effect on their returns.”
The Association of Investment Companies (AIC) asked the managers of leading infrastructure investment trusts what has been driving their returns, why their trusts are worth considering and the prospects ahead for the sector. Their answers are collated below.
What has driven the recent strong performance of your trust?
Muhammad Anwer, Chief Financial Officer for International Public Partnerships (INPP), said: “First, around 99% of our revenues are contracted or regulated, with 0.8x inflation linkage. That means we do not take significant pricing, usage or generation risk. Second, we have realised over £440 million of mature assets since mid-2023, each one at or above the value we held it at, and we have committed to reinvest around £480 million into new opportunities at an average return above 11%. Third, the portfolio simply kept performing, supported by a mature asset base, strong counterparties, active asset management and consistent delivery.
“This can be seen in INPP’s returns. The total shareholder return has run at an average of more than 9% a year since June 2023, the period over which our recycling programme has been at work. Furthermore, we have been able to pay a dividend that has risen by at least 2.5% every single year since we listed in 2006.”
Steve Cook, Head of Portfolio Management at SIMCo, the investment adviser to Sequoia Economic Infrastructure Income Fund (SEQI), said: “SEQI’s strategy currently delivers cash-covered dividend yield of approximately 8%. This appeals to many investors who are looking for income and resilience. We are highly diversified by asset class and geography, and our focus is on shorter-term debt which provides greater certainty and adaptability.”
“SEQI’s strategy currently delivers cash-covered dividend yield of approximately 8%. This appeals to many investors who are looking for income and resilience. We are highly diversified by asset class and geography, and our focus is on shorter-term debt which provides greater certainty and adaptability.”
Edward Hunt, Fund Manager of HICL Infrastructure, said: “HICL’s performance has been driven by a combination of strong operational delivery, active asset management and disciplined capital allocation. Since IPO, HICL has generated around 12p per share of NAV outperformance through selective disposals completed above the value on the balance sheet. Most recently, the sale of our interest in the A63 motorway was completed at a 21% premium to NAV.”
Richard Sem, Partner and European Head of Infrastructure at Pantheon Ventures and Manager of Pantheon Infrastructure (PINT), said: “Performance has been driven by robust earnings growth and capital expenditure deployment along with a strategy to invest in growth assets across different sectors. Realisations have proved that PINT’s approach works: the partial sales of Calpine and Intersect Power validated the model to invest in assets with significant value creation potential, and to crystallise that benefit through selling them.
“This has been welcomed by shareholders and we’ve seen share prices rise with demand. Our strategy, alongside the work we have done to educate and attract new investors, has helped to narrow the discount.”
Robyn MacHugh, Investment Adviser to GCP Infrastructure Investments, said: “Our performance reflects real progress on the capital allocation policy with effective active management of a variety of assets and a run of disposals, all at or above net asset value (NAV).
“The proceeds have been used to reduce GCP’s revolving credit facility balance to nil and return capital to shareholders through buybacks. This has been well received by the market with positive feedback from investors and a narrowing discount.”
“Performance has been driven by robust earnings growth and capital expenditure deployment along with a strategy to invest in growth assets across different sectors.”
How can infrastructure investment trusts help protect investors’ money from inflation?
Steve Cook, Head of Portfolio Management at SIMCo, the investment adviser to Sequoia Economic Infrastructure Income (SEQI), said: “For SEQI, there are several potential protections against inflation. SEQI currently pays a strong, cash-covered dividend of about 8% – that is about 5% more than UK inflation. So, with a simple strategy of reinvesting 40% of the dividend and keeping the other 60%, an investor can look to maintain the real value of their investment and at the same time enjoy an income of about 5%.
“Moreover, if inflation does increase, the likely policy response from the Bank of England would be to increase interest rates. That benefits debt funds like SEQI, since interest income on floating-rate lending can increase so there is a natural hedge against rising inflation.”
Robyn MacHugh, Investment Adviser to GCP Infrastructure Investments, said: “Infrastructure is a naturally defensive asset class as the underlying projects are usually highly contracted, with long-term, stable cash flows that are often linked to inflation. Therefore, in a high inflation environment, infrastructure trusts are well placed to protect the real value of investors’ capital, where more conventional fixed-income or equity holdings might otherwise be eroded. In our trust, 49% of the loans in the portfolio benefit from some form of inflation protection.”
“Infrastructure is a naturally defensive asset class as the underlying projects are usually highly contracted, with long-term, stable cash flows that are often linked to inflation.”
Muhammad Anwer, Chief Financial Officer for International Public Partnerships (INPP), said: “INPP’s inflation protection is written into the contractual and regulatory arrangements themselves. So when inflation rises, our income rises with it automatically, by formula, and it does so without relying on how much people use the asset, how many passengers travel, or where power prices sit.
“This is what has allowed us to raise the dividend by at least 2.5% every single year since we listed in 2006 – a record that is the longest unbroken run among UK listed infrastructure and renewable energy trusts.”
Edward Hunt, Fund Manager of HICL Infrastructure, said: “Many infrastructure assets have revenues that are either directly linked to inflation or benefit from regulatory frameworks that allow inflation to be reflected in future revenues. As a result, periods of higher inflation can support growth in the cash flows generated by the underlying assets, helping to preserve the real value of shareholder returns over time.
“Many infrastructure assets have revenues that are either directly linked to inflation or benefit from regulatory frameworks that allow inflation to be reflected in future revenues.”
“For HICL, inflation linkage remains an important component of the portfolio, which has helped support resilient performance across a range of economic environments.”
Richard Sem, Partner and European Head of Infrastructure at Pantheon Ventures and Manager of Pantheon Infrastructure (PINT), said: “Infrastructure provides protection from inflation through the nature of its underlying cashflows. Not all sub-sectors are the same, but typically the contracts, or regulation, that underpin PINT’s investments include provisions that link cashflows with inflation measures, such as CPI. This then flows through to increased current and future cashflows for our shareholders.”
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