The surge in demand for infrastructure trusts has forced managers to broaden the range of assets they purchase, leading to potential complications over how the vehicles stick to their risk parameters.
Rich valuations and depressed yields have pushed income-hungry investors beyond the likes of bonds and equities and into more alternative asset classes, benefiting sectors such as infrastructure.
The trend has accelerated in 2016 as the expectation of fiscal stimulus in the US and the UK further drives investors into the space. Average premiums on vehicles in the sector rose from 10 per cent in January, peaking at 19.1 per cent in July, before falling back slightly to 13.9 per cent by the end of October, according to the Association of Investment Companies.
But this demand has not been entirely positive for managers, who have issued shares in an effort to keep premiums in check while simultaneously contending with a lack of suitable assets to deploy new cash, forcing them to look beyond the typical remit of government-backed assets.
Last week HICL Infrastructure trust said in its interim results that it had faced a “demand and supply imbalance”, which drove up “valuations of infrastructure investments further”.
The company warned that sourcing new investments had become more difficult because vendors were increasingly turning to auction processes, while bidders often used “more optimistic cashflow assumptions” to reach the price necessary to win.
In a note on HICL, Stifel claimed that although the trust’s recent performance had been strong, it had been outbid on five projects in recent months, including toll roads, student accommodation and a UK gas distribution business, adding that there was an “extremely competitive” market.
Kieran Drake, investment trust researcher at Winterflood Securities, said the combination of fewer available UK infrastructure projects and high demand for shares had pushed trusts to broaden their horizons to a more global outlook.
He noted International Public Partnerships had teamed up with Hunt Companies in the US last year as an entry point into that market, while John Laing Infrastructure acquired a number of Spanish rail assets in 2016.
Commentators have cautiously backed these expansion plans, suggesting they can be useful to cope with new cash, but could send risk levels out of check.
“The key point for investors is that new additions to portfolios continue to be consistent with the funds’ risk-return targets, as well as the managers’ capacity to manage overseas assets or new asset types,” Mr Drake said.
Whitechurch Securities managing director Gavin Haynes, who added to infrastructure in the summer, said he was not surprised by the move to extend the scope of possible investments, but echoed Mr Drake’s concerns.
“It is important that the widening of the remit does not fundamentally change the risk-reward profile of the trusts, and investors are kept informed of any material changes,” Mr Haynes said.
Meanwhile, others have warned that current prices on such trusts could create significant downside risk.