Aim:
Tony Roper, director at HICL investment manager InfraRed Capital Partners, says the portfolio aims to invest in lower-risk infrastructure. “The investment thesis at the time of the initial public offering was to deliver a total return of 7-8 per cent in the long term and to target a progressive dividend, growing to 7p per annum,” he notes. The expected dividend for the year to March 2016 is 7.45p.
“The portfolio we’ve built up has allowed the directors to increase the dividend, which has been growing every year and is now paid quarterly,” he adds.
Process:
“Outside of HICL’s remit are infrastructure assets such as airports, ports and motorway service stations,” Mr Roper says. “I’m not saying they’re not infrastructure, but they are higher risk, higher return and probably not appropriate for this portfolio.
“In the case of HICL, we tend to buy assets that have historically been owned by construction companies – they’ve taken them through construction and now they’re looking for the capital gain and we’re looking for the yield.” The trust has bought investments directly from construction firms such as Carillion and Balfour Beatty in the past.
He points out that a hospital, which might cost between £300m and £400m to build, will come with all the contracts and debt in place. “In our results we publish the forecast cashflow we expect from the portfolio for the next 35 years and it’s that predictable yield that investors like,” he observes. “Part of the reason is the counterparties for these underlying investments are local authorities, NHS trusts or government, either in the UK or elsewhere in the world. I think investors in HICL like the more contractual nature of underlying revenue streams.”
Investing in infrastructure leaves the trust exposed to macro factors such as interest rates and inflation, but Mr Roper says that while the investments tend to have long-term debt secured against them, this debt is hedged. He explains: “On interest rates, we’re not exposed on the costs side. But because these projects tend to have cash on deposit, higher interest rates will increase income but will not affect the debt because it’s hedged. Should interest rates rise, we’ll see slightly increased income for the projects, [but not higher] costs.”
He says HICL has purchased shares in the past 12 months in response to investor demand, although he adds that assets are becoming scarcer. While trading of assets is not a “key feature” of the portfolio, he notes that it has sold two investments in the past year. “Partly because another co-shareholder initiated the sale process and the price offered was one where we decided it was better to sell than hold those investments,” he explains.
The fund’s factsheet shows the trust has ongoing charges of 1.14 per cent.
Performance:
HICL Infrastructure has comfortably outperformed its peer group, the AIC IT Infrastructure sector, across three and five years. In the five years to August 21 2015, the trust returned 78.8 per cent, against the sector average of 52 per cent. But it lags the sector in the past 12 months, delivering 11.9 per cent behind the sector’s 13.7 per cent.
As for those investments that have detracted from performance, Mr Roper acknowledges there are a couple of underperformers in the portfolio. He explains: “We have a couple of assets where performance has been poor, and we have contractual issues between the clients and ourselves. We have a road in Scotland where we have problems – we think it’s a construction defect and we’ll probably have to go to the contractor to get the quality of the road remedied.
“We are quite hands-on with the underlying assets when we have an operational issue. We’re on site working with the client and the subcontractors because we want to preserve our investment. Unusually for a trust like this, I have a team of eight asset managers covering the portfolio and their job is to visit each asset and manage it.”
Mr Roper is generally positive on the outlook for the trust and the infrastructure sector. He adds: “I think we still feel there’s potential to source new investments that will be accretive to the current portfolio, so I think that’s positive.”
EXPERT VIEW
Richard Philbin, chief investment officer, Harwood Multi-Manager
The trust sits on a 12 per cent premium to net asset value and has a yield of about 4.8 per cent (paying dividends quarterly) and almost £2bn in assets. This is spread across 101 assets, while the top 10 account for roughly 40 per cent. It invests predominantly in mature projects where income is already being generated. Almost 90 per cent of the investments are in the UK, with 75 per cent of the assets falling into three areas: health, education and transport. Although he is not looking to sell assets, the manager will opportunistically sell at good uplifts. For instance, a recent sale of Colchester Garrison was done at an 88 per cent premium to the price on the books.
