Investing in infrastructure [Members]
For MAVENS and MOGULS by The Investor
on February 11, 2025
Given we’re all up to our eyeballs in US tech stocks – waiting to see whether artificial super-intelligence is just around the corner, and if so whether it will cure cancer or exterminate us – it’s hard to believe that only a few years ago people paid up to invest in toll roads, hospitals, and *checks notes* government contracts to collect the rubbish.
Too young or drunk on recency bias to believe me?
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Thanks TI, great to see your take on this!
I’ve gone from holding 0 in this space to c.20% over the past 18 months. As someone who works in the real assets space, there is huge appetite for these assets from institutional investors, where this is a more efficient use of capital than linkers/tips (trading on 1-2% real yields vs 5%+ for infra assets). And the opportunity for us as retail to acquire these assets on deep discounts feels like the opportunity of a lifetime.
Unfortunately, the flood of issuance when the sector traded at a premium led to a dispersion in quality, so it is worth reading the investor presentations to understand the track record and KPIs. But there is real value on offer.
A good area to focus is discount rates – which are the key input to NAV, and give a rough idea of what rate of return you will earn by holding the portfolio to maturity (these assets are usually discounted cash flows, so will simply be discounting the cashflows over 20-40 year lifetimes of the assets). If you take Greencoat UKW as an example, they use an 11% discount rates, which equates to 10% net of mgt fees. They are also trading on a c.20% discount, so the actual implied return of holding the portfolio to maturity (just extracting the cashflows and not growing the asset base) is 12%+, with strong inflation linkage. Given equities have historically returned 5% real, this seems like an incredible value proposition.
Good overview, thank you. Hoping your follow-up piece is on PINT, because that’s the one I know least about!
I have these infrastructure trusts in my linker ladder ‘book’, instead of 10y+ linkers – I’ve been burned in the past by linkers going bidless in panics & so resolved to not put on anymore of them until they’re offering proper Liz Truss type yields (2.5% say on the TG36).
As you say, they’re bond like – maybe even long linker like, but with more upside. I’m weighted roughly for my best guess of quality, which seems to roughly tie into their respective NAV returns on the AIC website or similar. So lots of 3IN, some BBGI and less HICL, INPP and GCP.
No TRIG for me, looks too geared to technology that we wish would work but doesn’t quite yet work in practice in the UK (?). Would be great if we ever found a way to store the energy of windy days, but that seems to be forever ‘5-10 years away’. In the meantime it just seems like a play on ongoing government ‘net zero’ splurging, not a bet I fancy when ‘the consensus’ seems to finally be grasping the importance of growth and reality-based policy?
Thanks for this article TI as this is an area that I’ve been looking at and have increased our exposure to recently.
The fact that ITs in general are “out of fashion” at the moment, and those invested in real assets even more so, appears to me to be a good time to buy in at prices offering good value compared to many of the alternatives
I don’t trade so see these as long term holdings that offer something a bit different to global equity and bonds.
We hold a 2 infrastructure and 3 renewable energy ITs @1.5-2% per holding in our SIPPs and ISAs.
The oldest holding is HICL which we have had since 2015 so have enjoyed the rise and fall of the share price across 10 years. It’s “down” in terms of share price over that period but there have been steady dividends along the way.
The others have been added over the last 18 months as the attractiveness of the discounts on offer along with the future dividend stream (just entering the decumulation phase) became more compelling.
The current position is that we have c9% of the portfolio delivering a 9.75% yield with the possibility of upside on the share price as interest rates creep down and sentiment towards the sector hopefully increases.
Worst case (apart from outright failure of the IT) is a moribund or possibly slowly falling share price and a continued revenue stream.
[IT – %’age of portfolio @ % yield compared to purchase cost]
HICL – 1.6% @ 6% yield
3iN – 1.9% @ 4% yield
BSIF – 1.25% @ 7.8% yield
UKW – 1.66% @ 7.8% yield
SEIT – 1.7% @ 12.4% yield
Fascinating piece, thanks so much, @TI, and for throwing it out of the naughty corner to us Mavens.
‘It’s usually better to bet on a return to the mean than on the good times extending forever.’
Compelling when considered with BBGI, diversification and approaching decumulation. Perhaps not quite so naughty? Best pay attention when TI rings the bell!
Interesting. I hold BBGI and used to hold INPP in modest amounts, mainly through inertia as the performance hasn’t been great.
I am in drawdown ( or should be) and yep natural yield has its attractions, not least because you don’t have to make as many pesky sell decisions.
I have held ITs since the 1980’s when PEPs were introduced. Then the accessible investment universe was unit trusts or ITs and unit trusts had a typical annual charge of 1.5% and an initial bid-offer spread of 5%! The relative attractions of ITs was rather obvious even though the sell side pushed unit trusts.
Nowadays ETFs have eaten their lunch I reckon and I can’t see why the big old monoliths like F&C as was, or Alliance, can remain relevant.
Perhaps those focused on illiquid stuff still retain an advantage but buying on a discount is only attractive if you believe the discount will narrow.
Will have to think how to reinvest my £730 profit from BBGI !
Thanks for the article.
This fascinating piece (thanks TI) appeared the day after this appeared in my inbox:
https://www.trustnet.com/news/13437264/why-sjp-aj-bell-and-fe-investments-have-ditched-alternatives
They quote the ‘head of investment solutions’ at AJ Bell as deciding that
global listed infrastructure “has failed to offer diversification benefits on several occasions in the past and produced drawdowns greater than that of the global equity market. As with property, we consider infrastructure to be just another equity sector, albeit sometimes lower beta.”
Long term holder here of a number of infrastructure ITs, including HICL and TRIG. The dividends are nice, the drop in value of the shares not so nice but as long as the dividend is being paid, I’m happy to hold these in my income paying portfolio.
A couple of names you’ve thrown out which I hadn’t been aware of previously, eg PINT and INPP, so will check those out to see if worth considering, cheers.
Also, thanks for the factors to consider when investing in these ITs, I didn’t have all those on my checklist so will add to my list when I get round to reviewing my investments.
Thanks for the thoughtful comments all.
@LondonYank — Excellent and helpful thoughts, especially from a sector insider. Published/management discount rates are of course extremely important, but worth noting that they are subject to change at times so (as you know) they – and the implicit return projections – are not set in stone. More comments from the coal face on the real asset situation (especially in light of @Christopher’s comment) very welcome. 🙂
@Vroom — Not sure if it’ll be PINT, I’m possibly leaning more towards INPP. But will keep your vote in mind! 😉 Re: TRIG, well we differ a little there. To my mind these technologies are proven, albeit still being relatively new I’d accept the total ROI over the full lifecycle may not be fully understood and that they are also at risk of disruption. Agreed on battery storage. I don’t think we’re at a point though where renewables installation/capacity has seriously disrupted the grid enough for us to be too concerned about these assets from a big picture feasibility perspective, except perhaps in as much as it impacts political reality (as you conclude) and thus the potential for further incentives such as credits etc.
@Alan — Great to hear from a long-term holder. You seem admirably steadfast, hope it works out for you in the long run!
@2 more years — Cheers. Honestly I’m kicking myself for not getting to this sector sooner, as a couple of readers will know from previous comments I have it pencilled in for some deeper dives for a while and BBGI would genuinely have been my focus (just because it was to my mind the safest/highest quality, not because I foresaw an imminent bid I stress!)
@Paul_a38 — Definitely agree ITs have their work cut out to compete with ETFs. If they were all trading at or near par I wouldn’t be half as interested in the sector. My core expectation is that most of them will probably have their day in the sun again — although possibly not all at the same time — but that sunny moment may well be a sunset. As I’ve written before though, I’d miss these assets if they were to be gone. I’m not rich enough to get this kind of exposure independently (buying my own solar farm or laundromat or whatnot, or at least not in a diversified way) though I suppose open-ended funds with lock-up periods may need investigating if and when we reach that point.
@Christopher — I read that piece too. It’s certainly true that real assets, broadly defined, failed to respond the inflation shocks of 2021 to 2024. However I really feel this is hard to draw long-term conclusions from, due to the entanglement with the biggest bond bear market of all time. Of course these things all happened at the same time for a reason. But would a less monumental or at least unexpected inflation shock / bear market / whatever teach us a different lesson? I suspect so. All correlations go to one in a bear market, and while it proved short-lived for those with chunky global/US equity exposure (thanks almost entirely to the US tech sector) the 2022 was that.
@weenie — Cheers! Did you reinvest the dividends from the infrastructure trusts back into the same shares, or elsewhere? If we do get a re-rating then the last couple of years of heavy discounts will should boost the performance figures assuming dividend reinvestment.
@TI – all dividends have been reinvested back into the same shares so on those occasions, I’ve been very happy to see the big discounts!
@ TI, Christopher and the AJ Bell piece:
What we’re really talking about here is the gap between public vs private infrastructure.
The thing is, if we held these assets privately, everyone would be pretty happy. Private infrastructure has delivered a 11% annualised return over the past decade with volatility of less than 5%.
https://www.linkedin.com/pulse/infrastructure-builds-historically-resilient-portfolios-ozgde/
This is why institutional investors are all looking to increase their infra allocations.
However, with all of the vehicles discussed here, we are essentially buying ‘private assets’ in a listed wrapper. And that is subject to the vagaries of the market (including the idiosyncrasies of the UK stock market and who invests in investment companies).
So unfortunately as humble retail investors, you have to make a choice: either don’t participate in the asset class or do so with the knowledge that you will have higher levels of volatility than an institutional investor in private funds faces.
But we also have the benefit of being able to buy at a significant discount. And if you are a patient investor and long-term holder, the discount shouldn’t matter, as eventually that NAV will come back via dividends (with some of these vehicles, you’re essentially getting 1/10 of NAV back each year in the form of cash dividends).
Personally, I don’t see how these levels of discounts can persist forever. It may be a slow grind, but a combination of asset sales, buybacks and corporate activity will close the public-private gap.
I have had a material holding of INFR for ages. Candidly, I’ve no idea how it has performed recently but I have been increasingly mindful of the 65bp pa cost and the fact that I have a ladder of ILGs. Perhaps time for me to revisit the logic of the INFR holding. The trouble is I seem to do best by doing as little as possible.
Brilliant. Thanks @TI.
Looking forward to the reveal on Moguls. HICL possibly??? Strong index linking there with a correlation of 0.7-0.8 IIRC, v say INPP on 0.7.
Or will it be one of the renewable ITs perhaps? They’ve had their own trust to trust specific issues though and, in terms of sector wide gov support, Net Zero might be falling down the political priority list.
Can’t argue with point above (re @London Yank #1) that inflation coupled real infra returns projected at CPI + 5% does seem to offer more than ILGs and TIPS at 1% to 2% real yields.
But my concern FWIW is will UK infra ITs act ‘risk off’ if interest rates fall and, simultaneously (because of say poor macroeconomic outlook), global equities are selling off?
Put another way, do listed UK infra trusts diversity, a la bonds (e.g. if the backdrop of a general equity correction were deflation or disinflation and lower rates), or is it just another correlated risk exposure to equities but in a high divi wrapper?
IMO a difficult but a necessary question to try to answer for an investor seeking both yield and diversification.
Great article as always, I did hold BBGI it was a decent IT, I ended up selling after the news with a small profit, I will miss the dividend though. I still hold TRIG & UKW, with a view to look into 3IN or HICL.. Plenty of good ones left but I think BBGI was one of the better ones with a strong global approach I think. In terms of risks you have only got to look at the likes of DGI9 and how its ended up
@ Delta Hedge. To me, infrastructure’s overwhelming correlation is bond yield, not equities. You don’t need fancy regressions to see that, just pull up the 5 year charts! More specifically, it correlates with long bond yields (10y+) and more specifically again it correlates with long index-linked yields.
Back of an envelope it tracks the US 10 year, the price of money. Same as property (all sectors, all countries), art (all sectors, all countries), collectibles like classic cars, wine, stamps, whatever (all sectors, all countries) etc. Sure, there will be local bumps and troughs, but don’t mistake noise for signal. If long yields go up from here, infrastructure and all of those things go down and vice versa. The S&P, however, will continue to do its own sweet thing (unless yields start getting silly).
I agree that clarifying that is helpful. Once you’re onboard with infrastructure being basically a geared long linker play, it helps focus the mind on how ‘quality’ you want that infrastructure. Linkers can be a wild ride to start with (unless you ladder them to maturity) & long linkers more so. How much extra juice do you want to add?
I’m pretty chicken, so not much in my case (or in BCI’s, who bought BBGI). Sure, if long yields go down then the trash will outperform. But if they rise again there will be plenty of company for DGI9!
Thanks all for the further thoughts (not least @LondonYank for the requested follow-up! 🙂 )
On the subject of infrastructure trust risks and correlations, good points being made and I second @Vroom’s take, but I’d just add a very trivial but important one, which is that these trusts are not trading at 20-40% premiums anymore.
The share price declines since 2022 to a huge extent reflected their premium / overvaluation being blown-off, and the prices settling to today’s discount to NAV.
What’s more, discounts have settled here with the ten-year gilt yield at around 4.5%, not at the near-0% of a few years ago (when the trusts were pregnant with massive interest rate risk, ironically).
Looking at it very naively, we’ve seen a ‘60%’ of decline in valuation (40% premium to 20% discount) that happened when ten-year gilt yields moved decisively off the near-zero bound hit in 2020. (Of course this maths here is not exactly right re: actual price moves, I’m just making a directional point…)
But today? We will not come off near-zero interest rates again, and we are not looking at trusts on 40% premiums.
Hence the risk/reward is very different, even with this established correlation to bond yields.
Still plenty of risks of course, not least political! (Just look at the renewable trusts, which I consider a different category, in light of Reform’s comments today.)
@Vroom @TI wondering now if the right infra IT basket could even fully substitute for long duration ILGs and TIPS in the portfolio? If they’ve good risk off/interest rate down characteristics (as they appear they might have) then their high current yields (nominal and real) and discounts to TAV seem to give them more teeth than gov linkers. It’s always interesting that the options for the risk off side (commodo, infra, utilities, gold, trend/managed futures, conventional high quality gov bonds and linkers/TIPS) raise if anything more questions than the risk on (which you could boil down to double down on US mega cap momentum or go for mean reversion with Rest of World SCV).
I dunno. I held a broad selection of infra ITs as a diversifier for a long time. But ultimately became disillusioned. They tanked like all other equities when Covid hit, didn’t recover as well as other equity sectors did afterwards, and then tanked again when interest rates took off. They may have their merits, but IMHO diversifiers they are not.
@Mousecatcher07: you’ve just described the performance profile (or lack thereof) of my HYP (held outside ISA/SIPP back before Phil ‘spreadsheet’ Hammond started slashing the former £5k divi allowance). The 90% allowance reduction since was the occasion but not the cause to liquidate. But that was all ETFs (Divi ‘Aristocrats’ and the rest). In contrast here, both with the ITs being on steep discounts, and with the inflation linked returns on the underlying infra assets, might there perhaps be some/more of a floor?
Thanks for the article @TI, super pertinent and interesting. By a stroke of sheer dumb luck I doubled my BBGI holding the day before the announcement and am now waiting for a call from the FCA (fortunately/unfortunately it was a very modest ~1% holding)
Further to @LondonYank’s point on share price implied discount rates, it’s also particularly notable in the “core plus” funds in terms of the particularly wide risk premium it implies both on an absolute basis and relative to their own history, 3IN for example has a levered portfolio discount rate of 11.3% which is a 13% share price implied discount rate and in turn implies an 8.6% equity risk premium which is a full 4.1ppts above it’s long term average (per Bloomberg). This a fund that has done 14% p.a. net NAV returns since IPO in 2008 and 18% p.a. net since it switched to it’s core plus strategy in 2015. Latest trading update as robust as ever with a large asset sale 31% above it’s carrying value. PINT is on a 16.5% share price implied discount rate
The pure renewables funds perhaps you could theorise explanations (rightly or wrongly) for a wider risk premium in the current context but for something like 3IN which has been a model of consistency it’s hard to explain. Egregious fees sure but the net returns are still there and with relatively frequent exits there are regular reality checks on the NAV
Forgive me if obvious but I think it’s worth emphasising the distinction between the segments i.e.
Core Plus (companies) e.g. 3IN, PINT
Core (assets) e.g. BBGI, INPP & HICL
& Credit e.g. GCP, SEQI
Each of course has distinct risk & return characteristics but notably very significant differences in duration, particularly credit vs core assets. SEQI’s portfolio for example has an average maturity of 3.8 years and a modified duration of 2.03 (40% of it is floating) so differs drastically from core funds on correlation to real rates, you’re harvesting a chunky credit spread with little interest rate risk. Very relevant from a portfolio construction perspective when thinking about infra trusts as diversifiers
A notable difference between BBGI and the other core funds INPP and HICL was it’s geographic diversification, the remaining two largely UK focussed. It’s a limited opportunity set
On the relative volatility of listed versus private funds is this not just the usual function of a difference in liquidity rather than a difference in “risk” per se. You can put a toll road in a listed closed end fund with liquid but volatile shares or put it in a private fund and report a stable NAV but ultimately it’s the same toll road with the same cashflows. In a practical sense thinking about diversification, to my mind the shares have a higher beta to equities than you would like from a ‘diversifier’ and it’s not going to help your sharpe ratio much but if you simply focus on the sustainability of the cashflows and compound the dividends the (largely) non-cyclical nature of those cashflows is a useful diversifier
In my humble opinion the most intriguing sector to look at in the current context would be renewables given the beasting they are currently taking. TRIG on a 35% discount yielding 10% covered 1.1x by operational cashflow in the most recent period. It’s either in real trouble or it’s a great opportunity. There’s a lot to wrap one’s head around with power prices, weather, policy, subsidies, taxes etc etc. And since when did the rantings of Reform move markets !?
@ AoI, Learnt quite a bit there, thank you.
@AoI @Vroom – likewise to @Vroom. Thank you @AoI #20.
It’s a conundrum. The listed infra sector appears to be pregnant with opportunities and yet the discounts persist. Of course people do leave money on the table, and $100 bills do, from time to time, appear on sidewalks. But markets are at least somewhat efficient on pricing most of the time.
Is infra an exception? And/or is there some practical barrier to institutional investors arbitraging away the opportunity? E.g. an 8.6% implied ERP opportunity seems an obvious target.
It appears that TRIG is unavailable to buy on the Hargreaves Lansdown platform (something to do with MIFID II regulations). This may well apply to others which have been discussed previously.
@Gareth Ghost — Yes, Hargreaves Lansdown seems especially problematic in this area the moment, going by comments on Monevator here and elsewhere.
Personally I have about five brokers and can nearly always find one that’ll let me buy something, but it’s pretty ridiculous that it’s down to the discretion of individual platforms – it tells us how the rules are open to interpretation even by the experts!
@Aol — Great comment. I’d just add that BBGI differed because it really stuck to its PPI knitting, whereas the others have drifted to a greater or lesser extent.
I agree with you about renewables in terms of the potential opportunity, but the risks are a lot greater too IMHO. I might cover separately in Moguls, but probably not one for Mavens presently.
@Moguls (re: problems with availability on HL #23) – how does AJB fare for buying ITs inc. infra / renewables? (P.S.: also very interested in availability of WisdomTree Global Efficient Core UCITS ETF – WGEC on LSE, which is also not available on HL).
I think the HL restrictions are linked to the wider issue on trusts and cost disclosure rules, they’re requiring trusts to follow the old rules on disclosures and blocking those that don’t:
https://www.investorschronicle.co.uk/content/c02c6722-40a9-5c6b-b423-210dd2cd916b
@Moguls and @Mavens (with my apologies that #26 should have been addressed to both – my bad): thoughts on sizing infra and renewables within a portfolio? Feels like more than 5% but 15% and 20% are quite punchy…
GRID reported at anything from a 5.05% (AJB), through a 11.5% (HL), to a 14.8% (IC) and 15.1% (Investing.com) yield.
At least they all agree the discount is about 57% on a NAV of 109p.
Anyone able to shed some light on the yield discrepancy?
Didn’t find Gresham House’s website much use here:
https://greshamhouse.com/real-assets/new-energy/gresham-house-energy-storage-fund-plc/