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This infrastructure manager won’t buy infrastructure investment trusts

22 January 2018

LF Miton Global Infrastructure Income manager Jim Wright highlights valuations, style drift and political risk as concerns.

By Gary Jackson,

Editor, FE Trustnet

The manager of the LF Miton Global Infrastructure Income fund says he cannot buy infrastructure investment trusts at the moment, despite seeing them as a potentially good way for investors to access the asset class.

Jim Wright, who has managed the fund since its launch in 2017, said he would need to see infrastructure investment trusts move to “significant discounts” before he could include them in his portfolio.

Wright first highlighted his concerns about the price of infrastructure investment trusts around six months ago. Since then, they have fallen in value but not to levels that the manager considers to be attractive.

As the below chart shows, the average AIC Infrastructure trust is currently trading on a premium to net asset value (NAV) of around 10 per cent. This is lower than the 14.5 per cent premium seen in the summer of 2016, although the average premium has been below 6 per cent at times in the recent past.

Average AIC Infrastructure discount

 

Source: Kepler Partners

“We still believe that the infrastructure investment trusts are an efficient and well-managed way for investors to access infrastructure assets,” Wright said.

“However, we remain concerned that, despite share price falls in most cases, the investment trusts still trade at premiums to their stated NAVs. We would be looking for prices at significant discounts to stated NAVs before we considered that the risks to the asset class were factored in to valuations.”

Within the AIC Infrastructure sector, 3i Infrastructure is trading on the highest premium at 17.9 per cent. The lowest is HICL Infrastructure, where the premium stands at just 0.4 per cent.

But high premiums aren’t the only reason why Wright is staying away from infrastructure investment trusts – he also highlighted ‘style drift’ and the risk of full-scale UK private finance initiative (PFI) nationalisation as concerns.


When it comes to style drift, the manager noted that some infrastructure trusts have been buying stakes in UK regulated water utilities; this represents a significant diversification away from the PFI and public–private partnership (PPP) assets they traditionally hold.

An example is HICL Infrastructure’s acquisition of a stake in Affinity Water, a UK regulated water utility serving north-west London and the south-east of England, in May 2017. The trust paid an estimated underlying premium to regulated asset value (RAV) of 40 per cent.

However, Wright noted that Affinity’s listed UK water utility peers are trading at an average of a 9 per cent premium to RAV following recent price falls. He is concerned that the NAV of HICL’s Affinity Water stake may be over-stated based on a mark-to-market valuation, given the fact the trust paid a full price in a deteriorating regulatory and political environment.

“While other diversification away from the funds’ traditional stakes in PPP and PFI assets do not look quite as challenging as UK regulated water, we would reiterate our caution of six months ago,” the LF Miton Global Infrastructure Income manager said.

“While it was logical that investors would historically pay premiums to stated NAV for scarce, undervalued and otherwise inaccessible PPP and PFI equity stakes, it does not follow that stakes in other infrastructure assets should command the same premium valuations to stated NAV.

“The risks of changing regulation, demand trends and other variables, alongside the ability to invest in these assets via listed companies, suggests to us that any NAV premium in these cases is unwarranted.”

Turning to politics, Wright said infrastructure investors are currently in a “fascinating scenario” where they have to assess the “unquantifiable risk” that would come from a Labour government, even though no general election is on the horizon.

Shadow chancellor John McDonnell has explicitly said a Labour government would “look to take control” of PFI contracts by bringing them in-house if necessary. Furthermore, Wright argued that infrastructure investment trusts are “in the political firing line” because of their offshore status: HICL, International Public Partnerships and John Laing Infrastructure are registered in Guernsey and BBGI in Luxembourg.

“There are many potential legal, economic and practical impediments to a full-scale PFI nationalisation programme, not least the fact that the Labour party has to win a general election as a prerequisite to taking any action,” the manager concluded.

“Commentators have rightly pointed out the prohibitive cost of compensation, the adverse impact on any future foreign direct investment in UK infrastructure assets and the legal challenges which would undoubtedly be forthcoming from disenfranchised investors.

“However, we would caution that ideology can often trump practicality and that rational investors cannot discount the threat that the infrastructure investment trusts may lose assets, particularly in health and education, with inadequate compensation.”


Wright has managed the LF Miton Global Infrastructure Income fund since its launch in March 2017, over which time it has made a 3.68 per cent loss. This puts the fund in the bottom quartile of the IA Global Equity Income sector.

However, it must be noted that this is a time frame of less than a year and is therefore too short a period to judge a fund. In addition, other open-ended infrastructure funds such as First State Global Listed Infrastructure and Russell Investments Global Listed Infrastructure have posted lacklustre returns over the period owing to negative investor sentiment towards the asset class.

Performance of fund vs sector and index since launch

 

Source: FE Analytics

The fund has the aim of generating income with the prospect of long-term capital growth while Wright has 19 years of investment experience and was previously sole manager of the British Steel Pension Fund’s global listed infrastructure portfolio.

Some 38.3 per cent of the portfolio is in utilities, while 23.4 per cent is in oil & gas pipelines/storage, 20.1 per cent is in transport and 17.9 per cent is in telecoms. Its top holdings include Enbridge, TransCanada, Union Pacific Corporation, Xcel Energy and Enterprise Products.

LF Miton Global Infrastructure Income has an ongoing charges figure (OCF) of 1.05 per cent.

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