This article is part of Morningstar's Guide to Alternative Investing. Here, as part of the Perspectives series, Alan Brierley of Cannacord Genuity outlines the ongoing appeal of infrastructure trusts.
Compelling income characteristics; attractive, sustainable, cash-covered and progressive dividends backed by long-term and highly predictable cash-flows, superior risk-adjusted returns with low correlations and lower volatility, and capital preservation qualities have established listed infrastructure as a cornerstone for many investors.
However, more recently, bond markets have reacted negatively to Brexit, the US presidential election, expectations of higher government borrowings to fund fiscal stimulus programs and the potential re-emergence of inflation. Notably, a sharp sell-off in bonds has spilled over into some of the infrastructure funds.
While only time will tell whether the anticipated fiscal stimulus will have a greater success in igniting inflation than quantitative easing, it would now seem prudent to consider the impact of inflation on portfolio exposures. To this end, we highlight that the underlying revenue streams of listed infrastructure afford a range of explicit inflation protections.
Secondly, we don’t see any meaningful increase in discount rates, with historically high risk premiums acting as a buffer against higher risk-free rates, and with valuations and the discount rates underpinned by intense competition for scarce assets.
Accordingly, we regard the recent weakness as an attractive buying opportunity. Our long-standing sector overweight view is underpinned by the features outlined above. Indeed, given current debt levels and equity valuations, and with a sharp spike in bond yields typically coinciding with financial market crises, we are more concerned about the impact of further rises in bond yields on equity values. If this happens, then the reassuringly dull capital preservation qualities of Listed Infrastructure could have significant value.
Renewables Infrastructure (TRIG)
TRIG provides investors with a diversified exposure to renewable infrastructure; the portfolio comprises wind and solar projects in UK, France and Ireland. Since launch in July 2013, the company has put in place solid foundations and achieved critical mass; there are 52 projects with a net generating capacity of 686MW, while the market capitalisation is now £812 million.
In a lower for longer environment, which is now looking increasingly entrenched, a progressive and cash covered dividend, and 5.8% yield, have obvious attractions. In addition, given supply/demand dynamics, we see scope for further compression in discount rates moving forward. We believe TRIG has an important role to play in improving portfolio diversification.
HICL continues to generate attractive risk-adjusted returns, with a focus on infrastructure projects at the lower end of the risk spectrum. In an extremely competitive marketplace, the company has pursued a highly disciplined approach to new investment in recent years. Although mindful of the premium rating, the income characteristics remain attractive.
