by Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Public Infrastructure investment in most OECD countries is running at about 30% below the historic norm (Source: Credit Suisse), having been cut sharply through the financial crisis. Public infrastructure investment is nearly 40% below the estimated 3.5% of GDP that needs to be spent in this area. In the US for example, there is a $1.4 trillion funding gap, with for example the average age of roads being 27 years.
In the UK there is a clear bias to an easing of fiscal policy since the election. The balanced budget has been postponed, the public sector pay cap has been lifted and Chancellor Hammond has already pledged to increase government infrastructure investment to 1.0-1.2% of GDP every year from 2020 onwards. More homes and transport were high priorities mentioned in the Budget, where the existing £23 billion infrastructure investment fund was increased and lengthened. The Labour party, if elected, have stated that they would put £500 billion into infrastructure over the next ten years!
There are four London listed investment trusts that invest predominantly in PPP/PFI concessions, with a finite life of 20-30 years. These funds typically provide risk capital for a wide range of geographies and have varying mixes of regulated/non-regulated assets. Interest rates, foreign exchange treatment, inflation linkage are important drivers for the sector.
|Name||Target Return %p.a||UK||Europe||N.America||Australia|
BBGI (BBGI)- aims “To provide investors with secure and highly predictable cash flows by investing in equity and subordinated debt of infrastructure projects that have been developed under the PFI/PPP procurement models. Major holdings include Golden Ears Bridge (12.9% of assets-Vancouver) and M80 motorway (6.45%-Scotland). Current Yield 4.6%,13.4% premium to assets.
HICL Infrastructure (HICL) “is a long-term equity investor in infrastructure, working with public sector clients to deliver high-quality projects which support the community and provide essential public services”. Holdings include Affinity Water, A249 road (UK), High Speed Rail Link (Holland), Croydon Schools (UK) and a RCMP divisional HQ (Canada). Prospective yield 5.0%,4.3% premium to assets.
International Public Partnerships (INPP) “aims to provide investors with sustainable long term returns through growing dividends with the potential for capital appreciation”. Major projects include Cadent (UK gas distribution), Thames Tideway Tunnel (London),Diablo Rail Link(Belgium).Prospective yield 4.4%,8.8% premium to assets.
John Laing Infrastructure Investment Trust (JLIF) aims “To actively generate long-term sustainable value for shareholders by investing in equity and subordinated debt issued in respect of a portfolio of concession based infrastructure projects that are in their operational phase”. Projects include Barcelona Metro stations (11.8%-Spain), Connecticut Service Stations(7.5%USA),Forth Valley Hospital (6.0% Larbert,Scotland),North Staffordshire Hospital (5.5%).Prospective yield 5.68%.Premium to assets of 4.7%.See graph below by clicking on link.
Over the last five years, the sector has traded on large premiums to assets, sometimes as much as 25%, as investors have sought high dependable income streams, in readily realisable form, that bore low correlation with either mainstream equities or gilts.
However, following the Shadow Chancellor’s comments regarding PFI at the Labour Party Conference in September and other Labour Party comments in October suggesting a windfall tax, the sector has rapidly derated.In mid-November JLIF released a figure for the value ascribed to compensation due if all their UK PFI contracts were cancelled by the relevant local authorities., which came in at 86% of contract carrying value in NAV.In my opinion, the share price falls have been more than the worst case scenario (Labour government, differing UK PFI exposure, instant cancellation of contracts etc) and value now exists in this sector, despite the bounce seen so far.
Over the same period the gilt yield has barely moved and thus the actual and relative yields on all four companies have risen. Clearly a classic risk reward situation has developed for anyone waiting to add/build exposure to the sector. John Laing (5.6% yield) and HICL (5.0%yield) could provide the largest upside if the worst case does not materialise with BBGI and INPP as the” safer” plays, Interestingly, my two renewable infrastructure plays, which have very little to do with PFI,have dropped slightly and also look attractive if looking for secure income streams, Bluefield 6.4% and Greencoat 5.4% and low correlation.GCP Infrastructure on a yield of 6.4% may also appeal to more fixed interest oriented investors.
In summary, depending on risk appetite, I would recommend some exposure to the area of infrastructure and or renewable investment trusts, as equity and conventional fixed interest sectors are looking increasingly vulnerable.
Sources: Credit Suisse, Winterflood, Numis, London Stock Exchange, Trustnet.
Full fourth quarterly report will be available in January and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, new model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring. I expect more clients to consider switching some final salary pots to SIPP over coming quarters, as transfer values start to slip (partially in line with rising gilt yields) and can work with you providing bespoke portfolios according to client needs.
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
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Please contact Ken, (firstname.lastname@example.org) for further information