Infrastructure assets have long been regarded as a go-to means of achieving inflation-beating returns and, while prices soar elsewhere, the London market may currently offer investors bargain options.
US stock markets are the traditional home of listed infrastructure companies but Britain is home to a host of infrastructure investment trusts, which have so far this year raised more cash from investors than any other type of listed fund.
Renewable energy infrastructure trusts have raised more than £1billion since the start of the year, according to Association of Investment Companies data, while traditional infrastructure has raised £621million.
Investment in Renewable Energy Infrastructure helps pay for an maintain critical assets like wind farms
However, despite surpassing investment trust peers for fundraising, both sectors have seen their premiums to net asset value fall since the start of the year.
The average infrastructure sector trust is currently trading a premium to NAV of 9.6 per cent, down from 13.3 per cent at the start of the year.
Renewable energy infrastructure trusts have seen a more modest fall from 6.5 per cent to 6 per cent.
Infrastructure as an asset class is generally considered to be a good inflation hedge because demand in the sector is considered ‘inelastic’ – meaning that rising costs can generally be passed on to customers.
However, this can vary in practice.
Economic infrastructure, such as toll roads, has an indirect inflation link through the ability to reprice, but is more exposed to demand pressures.
Meanwhile, renewables infrastructure can be more exposed to revenue volatility as the price of power fluctuates.
Public infrastructure is best placed as revenues are generally fixed with inflation adjustments, particularly when the customer paying the bill is a government or local authority.
Annabel Brodie-Smith, communications director at the AIC, said: ‘There is continued demand for the Infrastructure and renewable energy investment company sectors
‘In this year’s difficult inflationary conditions, with the war in Ukraine sadly continuing, both sectors have their attractions.
‘The Infrastructure investment company sector can deliver income which is contractually linked to inflation through indexing, providing some comfort to income seekers when inflation is rapidly rising.
‘The renewable energy infrastructure sector has benefited from rising energy prices and the desire for a greener and more self-sufficient energy strategy.’
The top funds in the AIC’s Renewable Energy Infrastructure sector [click to enlarge]
What can I invest in?
Within the pure infrastructure sector, six of the 10 trusts have a track record of at least 10 years, with an average share price total return 191.4 per cent over that period.
The FTSE 100 has returned roughly 45.9 per cent over the same period.
However, at a current premium of 9.6 per cent the sector may seem expensive, with just one constituent – Sequoia Economic Infrastructure Income – currently trading at a discount.
Alternatively, investors can look at the relatively new sector of renewable energy infrastructure, which can offer the diversification benefits of traditional infrastructure while offering exposure to trends like decarbonisation and sustainability.
There are just six trusts in the 22-strong sector with five-year track records, the average return of which over that time is 53.8 per cent. Greencoat UK Wind tops the charts over five years with a return of 65.2 per cent.
The FTSE All Share is up 22.2 per cent over the same period.
Renewable energy infrastructure is also less expensive relative to traditional Infrastructure, with an average premium of 6 per cent to NAV, ranging from an 18 per cent discount to NAV of £96.2million for Aquila Energy Efficiency to a premium of 23.8 per cent to NAV of £0.99million for ThomasLloyd Energy Impact.
Both sectors also offer an attractive income opportunity, with Infrastructure and renewable energy infrastructure currently yielding 4.6 per cent and 5.3 per cent respectively.
Six of the 10 trusts in the Infrastructure sector have a track record of at least 10 years, with an average share price total return 191.4 per cent over that period [click to enlarge]
What do the experts say?
Here, experts detail their picks for the best options in the Infrastructure and Renewable Energy Infrastructure investment trust sectors.
Tara Clee, ESG analyst at Hargreaves Lansdown: JLEN Environmental Assets Group (Renewable Energy Infrastructure)
‘JLEN invests in a diversified portfolio of environmental infrastructure projects, aiming to pay investors a sustainable, progressive dividend every quarter, while sheltering the capital value of its portfolio.
‘The trust has three key objectives: to promote the efficient use of resources, to develop positive relationships with the communities it works in, and to ensure effective, ethical governance across the portfolio.
‘One of its investments is with the East London Waste Authority, a multi-site project that processes waste from four London boroughs. The waste is biologically treated to produce solid recoverable fuel and other recyclables. The project successfully diverts around 96 per cent of all waste received from landfill.’
JLEN Environmental Assets Group’s portfolio is UK-focused has its largest exposure to wind power, followed by anaerobic digestion and solar power
By contrast, Sequoia Economic Infrastructure Income invests in a global portfolio of assets in diversified sectors
The Renewables Infrastructure Group Limited (Renewable Energy Infrastructure)
‘The purpose of this London-listed investment trust is to generate sustainable returns from a diversified portfolio of renewables infrastructure that contribute towards a net-zero carbon future.
‘By investing in renewables, TRIG is helping to provide clean energy across the UK and Europe, through the construction funding of new greenfield infrastructure. The clean energy generated by the portfolio in 2021 was capable of powering the equivalent of 1.7 million homes for a year.’
Peel Hunt analysts: Sequoia Economic Infrastructure Income (Infrastructure)
‘This is a diversified portfolio of 65 private debt investments and eight infrastructure bonds, across eight sectors and 29 subsectors.
‘Private debt investments represented 95 per cent of the total portfolio, and 50% of the portfolio comprised floating rate assets.
‘SEQI has been dealing with some difficult loans to Bulb Energy, Salt Lake Potash, and a school in Washington, but the latest update from the manager suggests that business as usual is within reach, backed by a dividend cover that we expect to rise from c.1.04x to 1.1-1.15x, and a cautious, risk-aware management approach.’
What sort of assets do these trusts invest in?
Managers of the FP Foresight UK Infrastructure Income fund, which invests in infrastructure investment trusts, Nick Scullion and Mark Brennan explain the benefits of the sector.
What does the portfolio of an infrastructure investment company typically hold?
Scullion: ‘In UK market it will range from solar farms to wind farms, to schools, hospitals, fibre optic networks, and energy efficiency assets.
Brennan: ‘Part of the reason that you might go more broad than the UK for more diversification, there’s assets like large scale, hydroelectric generation, that you can get in Scandinavia or Canada.
‘You might get pumped hydro storage facilities in upstate New York, where you might want counterparty diversification, for example.
‘There’s political risk in infrastructure investing, and if you can diversify that by spreading it across many different jurisdictions that can be effective.’
FP Foresight UK Infrastructure Income primarily invests in the UK with the bulk of exposure in renewables
How will the size of a trust impact my investment?
Scullion: ‘There’s pros and cons to bigger and larger trusts. With the big ones, there’s more liquidity, they’ve probably got a number of underlying assets, and therefore there’s more diversification.
‘Their cost of debt is also probably lower so you get some scale benefits with the bigger ones.
‘Often on the smaller funds, you’re getting access to slightly more nascent technologies, and sub sectors, which often will deliver slightly higher total return performance in the early years, but probably slightly less liquidity. So there’s a trade-off.’
Should I invest in core infrastructure or renewable energy infrastructure?
Brennan: ‘Since inception, our fund has always held a pretty even balance between renewable energy and traditional core infrastructure – at around 40 per cent each.
‘That’s largely because, while you’re getting similar types of underlying cashflow, inflation, protection and income, the risk factors and drivers of return are quite different between those two sub sectors.
‘When you put them together in a portfolio with an even split then, from the fund’s perspective, that generates very low volatility and stronger diversification.’
FP Foresight UK Infrastructure Income’s top 10 holdings
How would an economic slowdown impact these assets?
Scullion: ‘Broadly speaking, infrastructure and renewable energy assets are not particularly economically sensitive.
‘The returns they generate are really not that closely correlated to GDP. So while a low growth environment would be negative, it’s not necessarily going to damage the performance of these assets, on a relative basis, because they generally have underlying long-term contracts.
‘Generally speaking, these are defensive places to allocate your capital in a recessionary environment, given that the cash flows and revenues are not dependent on economic activity.’
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