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BV Services  - Nigel's fund picks

Nigel's Fund Picks

Nigel is providing his Fund Picks, but he is doing this with the strong proviso that they are not to be regarded as recommendations. They are simply his view of the current investment scene. They will definitely not be suitable for everybody and those investing in them without advice will do so at their own risk. Please contact Nigel if you would like to receive investment recommendations suitable for your portfolio.

Fund Talk 01
Big, Boring, Green and Offering an Average Dividend Yield of around 5%

The article below indicates that I have been a fan of infrastructure funds for quite some time not dated but 5 years plus years ago.  But they have evolved.  The ones mentioned in that article such as HICL, GCP and International Public Partnerships (John Laing Infrastructure has been taken over) are traditional infrastructure companies funding Government projects such as hospitals, schools, prisons, toll roads etc.  Their big attraction is that a high proportion of their contracts have a built-in inflation adjustment (over 80% in the case of HICL) so they can often offer rising dividends on top of an already high dividend yield.  For example, HICL currently offers a dividend yield of over 5% paid or reinvested quarterly, GCP over 6% paid or reinvested quarterly and International Public Partnerships nearly 5% paid or reinvested half-yearly.

But since I wrote that article several years ago, Green Energy has come into investors orbit and I would now describe the infrastructure scene as follows:-

Fund Talk 01

Green Infrastructure Investments Trusts

They are primarily first movers in green energy and benefit from a combination of generous electricity Feed In Tariffs and longer term Government subsidies.  For example Foresight Solar which offers a dividend yield of over 5% is entitled to Government subsidies for another 20 plus years; but if you want to set up a solar farm in the UK today there would be no Government subsidies.

Green Infrastructure Unit Trusts

There are a number of them with one interesting high-yielding one being Gravis Clean Energy.  It majors in investing in so-called “yield cos” which are the green spin-offs from giant US energy companies.

Infrastructure Investment Trusts

As mentioned earlier, the likes of HICL offer a good dividend yield and rising dividends.  However, some infrastructure companies in this sector have recently lost out to green energy rivals in terms of share price capital appreciation.

Debt Infrastructure Investment Trusts

In this section, companies like GCP only invest in debt infrastructure.  So, although they offer a high dividend yield, prospects for capital appreciation are modest.

There are a number of other ways that investors can invest in infrastructure.  For example, 3i owns 34% of 3i Infrastructure and into this category comes Primary Health Properties which builds new GP surgeries rented out to doctors and with leases underwritten by the NHS.

Fund Talk 02

Infrastructure Funds

What is an infrastructure fund?

 Governments around the world like to leave a legacy of shiny new projects but don’t want the cost of them put on their balance sheets.  So what usually happens is that a Special Purpose Vehicle is set up incorporating a builder of the project, somebody to maintain it for 20-40 plus years and financiers.  Not only do the financiers usually obtain a Government guarantee but can charge the Government an interest rate of, say, 9% which works out at around 5% for investors in those funds in terms of dividends paid. Once built some infrastructure (but not all) take equity stakes in them. Income Payments can also increase with inflation but probably not at current low inflation rates.

Institutions particularly like infrastructure funds because they provide them with a long term steady stream of income which they need to meet long term commitments such as paying pensions.  Until a few years ago, inflation-linked Government securities did this job but, because inflation is so low, the interest return on inflation-linked Government securities is about half that on infrastructure funds. Five quoted infrastructure fund are big enough to be included in the Financial Times 350 Index which is the index of the largest 350 companies quoted on the London Stock Exchange.

Of course there is always the timely warning that any non-cash investment can go down in value as well as up. But look at 5 year share price graphs (courtesy of the London Stock Exchange web site) and you can see why I consider these funds seem to be “steady eddies” in terms of holding their value, increasing it slightly and obviously paying a much higher return than available on cash.

Stewart Ivory (formerly First State) has a Global Infrastructure unit trust yielding around 2.8% and giving more exposure to the US. Coming next month are more infrastructure unit trusts including one from Legg Mason.

So in uncertain investment times, I believe that prospects are promising for both European high yield bonds and infrastructure funds at a time of difficulties in terms of world economic and political prospects.


Tech Talk 03



I should also emphasise that these two products are quite different in their make-up. The price of a unit trust will always be Net Asset Value (NAV) and so will always be the value of the unit trust portfolio on any one day divided by the number of units in issue.  When there is more demand for units, they can be created and when there is less demand or there are net sales then units can be cancelled.The infrastructure funds are a bit different in that they are investment trusts or investment companies and have a fixed number of shares in issue unless more shares are issued from time to time.  So the price of the shares depends much more on demand and this means that the shares can stand at a premium or discount to NAV.  At the moment these infrastructure funds are standing at a modest premium to NAV which does not worry me because in the background are institutions wanting to purchase these shares to meet long term commitments.

Fund Talk 01

Beware of Utilities

Beware, however, of infrastructure funds that have the name “infrastructure” in their title but are more utility investors.  I say beware because particularly in the UK, utilities are under the cosh not only from regulators but also a potential future Labour Government.  Whereas the Labour Party wants the level of renewable green energy to rise from a current 33% of electricity use in the UK to 60% by 2030, there is no doubt that utility companies like the big water companies are under pressure to reduce prices and leaks.  It is unfortunate that many of the UK water companies are owned by Private Equity who have taken out enormous dividends to date.

The potential woes for utility companies overseas are not as serious as in the UK but, again, I would suggest that it would be better to invest in infrastructure companies which have long term contracts with Government and State agencies.  This is better than utility companies like water companies who, at best, only have short term agreements and could certainly be taken over at possibly not a good price.

I develop a number of infrastructure portfolios for clients so if you want further information, please let me know.  

My basic charge for portfolio advice is just 0.5% of the value of the portfolio.  

Please note that I have changed my e-mail address to reduce spam to:

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