Last year investment trusts in this sector were on double-digit premiums, but some are now available on a discount.
Finding sustainable income at a sensible price is becoming increasingly difficult for investors as the nine-year bull market rumbles on.
Pockets of potential value remain, most notably among UK domestic stocks, which have caught the attention of various investors, including Neil Woodford.
As ever, though, investors risk catching the proverbial falling knife, and while UK equities in general continue to be given the cold shoulder by investors, there is no obvious catalyst that will revive domestic stocks’ fortunes. According to the latest statistics from the Investment Association the UK all companies and UK equity income sectors saw nearly £600 million withdrawn by investors in January.
At the other end of the scale, income investments that tick the sustainable box have been highly prized and as a result have been carrying expensive price tags – none more so than infrastructure investment trusts. Companies involved with long-term projects such as toll roads, rail networks or electricity grids are viewed as solid holdings throughout the economic cycle, because the contracts tend to be very long-term and usually include clauses to adjust for inflation.
Infrastructure has high barriers to entry and strong pricing power, and as a bonus investment trusts that specialise in the sector have been offering juicy yields of around 5 per cent. That’s something that did not go unnoticed by investors, as for a couple of years trusts in the sector were trading on high double-digit premiums.
Over the past year HICL Infrastructure Company and John Laing Infrastructure have typically traded on a premium of 7.7 per cent and 10.5 per cent, according to Winterflood, the broker. This, however, is no longer the case, and they are now on discounts of 4.8 per cent and 3.4 per cent respectively.
The reason why premiums have cooled is down to political uncertainty, amid fears a future Labour government would meddle with Private Finance Initiative (PFI) projects, which would impact contracts for UK public assets such as hospitals, schools and transport.
Last September, as part of the Labour Party conference, shadow chancellor John McDonnell pledged to 'bring existing PFI contracts back in-house'. As Jason Hollands, of Tilney Bestinvest, pointed out at the time, Labour’s pledge will unsettle investors, particularly those who hold HICL Infrastructure and John Laing Infrastructure, which have the highest headline exposure to UK PFI.
In addition, the collapse earlier this year of Carillion further dampened sentiment, with some trusts in the sector, including HICL Infrastructure Company, having exposure to assets that were managed by the construction firm. Carillion was a significant holder of PFI contracts, so its collapse has added fuel to the fire.
Some investment analysts, though, argue that despite heightened political risk, infrastructure trusts still offer investors exposure to ‘high-quality inflation-linked cashflows, which are difficult to replicate’.
Moreover, there are plenty of unknowns regarding Labour’s policy and in any case the next election is not due to take place until 2022. A snap election could be called, but such an event is impossible to predict. Therefore, it could be a good time to pick up some shares on the cheap, given the collapse in premiums.
In its 2018 investment trust recommendations Numis says: ‘We believe the asset base of most businesses is conservatively valued, relative to pricing being achieved across the private infrastructure market. In our view, this should limit the potential for persistent discounts across the sector. Where they appear periodically, investors which have avoided the sector due to high premiums may well see current share price valuations as an opportunity to own.’
Killik, the stockbroker, agrees there’s value in the sector. It has 3i Infrastructure down as a ‘buy’. The trust is currently trading at around par (0.2 per cent premium) versus its 12-month average premium figure of 9.3 per cent. 3i Infrastructure only has a small amount of exposure to UK PFI, comprising less than 10 per cent of assets.
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