Launched in November 2006, the £952.1m International Public Partnerships (INPP) company aims to deliver a long-term sustainable return by investing in low-risk infrastructure assets.
The portfolio is geographically diverse, with a focus on the UK and “other developed countries such as Australia, Canada, and parts of Europe where there are low levels of perceived political risk and high levels of confidence in the rule of law”, says director Giles Frost.
The trust sits in the AIC Infrastructure sector. Its investment adviser is Amber Infrastructure, which is responsible for the development and management of the 115 assets in the portfolio.
Mr Frost says the investment process has not materially changed since INPP was floated, with the fund delivering annual dividend growth of roughly 2.5 per cent each year since launch.
But he adds: “Like all sectors, we have had to adapt to the shifting dynamics in the market. An example of this is that the attractiveness of assets such as those INPP invests in has increased competition in the sector. The current competition in the secondary market is a prime example. The increased level of capital into the sector means a key feature in the future success of managers is the ability to originate assets directly from governments. This is our preferred approach and is a key differentiator from the approach of some other managers.”
As the portfolio’s underlying assets tend to be linked in some way to governments, assets such as government bonds exert a macro influence on the process. “More generally,” adds Mr Frost, “infrastructure is often seen as a barometer of an economy’s health. In most developed economies, the provision of new infrastructure remains a priority. As the IMF has recently emphasised, it can also be a driver of economic growth, irrespective of broader market conditions.”
The portfolio also has a particular focus on investment opportunities with a high level of inflation linkage. “Across the portfolio, a 1 per cent increase in inflation above current projections, would increase average returns by 0.81 per cent,” explains the manager.
Given the macro environment, the investment company has performed strongly in the five years to October 23 with a return of 64.26 per cent, outstripping both the AIC Infrastructure sector average of 54.76 per cent and the FTSE All Share index return of 51.56 per cent, according to FE Analytics data. Year-to-date performance is equally impressive, with a 12.59 per cent return against the sector average of 10.55 per cent.
The portfolio has evolved over time, with three trends helping to drive performance. The first is finding new infrastructure investment sectors, such as offshore transmission, which has gone from unknown to one of the most sought-after sub-classes in recent years.
Secondly, Mr Frost says: “Where INPP has not initially owned 100 per cent of an asset, it has sought to insist on also acquiring pre-emption rights on the shares it does not own. This has allowed it a preferential right to acquire additional investment in those assets over time.
“Third, given the strength of the secondary market for these sorts of infrastructure assets, where there has been no realistic scope to increase the stake in minority, non-core holdings, INPP has been willing to take advantage of high secondary market prices by divesting minority stakes, delivering significant uplifts on original purchase prices and reinvesting the proceeds in newer opportunities.”
The team avoids newer markets that might have higher returns but come with higher risks. “Our greatest successes have come through identifying new assets and sub-classes of infrastructure activity that are homogeneous with our portfolio in economic and risk terms but have not yet been recognised by the wider market,” Mr Frost explains. Examples include a focus on early-stage assets, including those still in construction, such as the new Education Ministry building in Berlin. The manager adds: “We see exciting opportunities in many countries but notably in Holland and Germany, where pressure on public finances is increasing the use of private capital in financing of new infrastructure.”
EXPERT VIEW
Jake Moeller, head of research, Lipper UK and Ireland
This portfolio has 115 projects and a broad sector and geographic exposure. The objective of this fund is quite loosely defined with a broad-based inflation and yield reference, but it has also experienced a steady return stream, being particularly resilient in 2011. INPP is also exposed to key-person risk in the form of the highly experienced Giles Frost. This fund has a consistent track record of dividend payments being well covered by operating cashflow and its liquidity is augmented by cash and some higher-quality debt holdings.
