Fund Profile

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by HICL Infrastructure. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
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Overview

HICL offers shareholders an exposure to institutional quality, lower risk infrastructure assets. The manager, InfraRed Capital Partners, has an emphasis on achieving strong income returns, generated through sources as robust and diverse as possible. Certainly, with Carillion a relatively fresh memory, and with no corresponding adverse impact on the dividend paid by HICL, the diversified approach looks like it is, well… paying dividends.

The majority of the company’s assets offer predictable cashflows, and are uncorrelated to the economic cycle. The manager has been investing a greater part of the portfolio in demand-based assets, which can have returns more correlated to GDP and inflation, but also have a significantly longer life than traditional PFI / PPP assets. Whilst allocations to these types of assets have risen from 9% of NAV in March 2017 to 19% at the current time, the manager has a soft limit of 20% to ensure that the portfolio, as a whole, is largely uncorrelated with the wider market.

At the heart of HICL is a portfolio of investments with annuity-type income. As such, in our view, the longevity of the assets owned by HICL is important, given that at the end of each contract’s life there is a zero terminal value. The manager has been successfully extending the average portfolio duration over time. Indeed, over the year to 30 March 2018, the managers succeeded in increasing the weighted average asset life from 24.4 years to 29.5 years.

On a total return basis, HICL’s NAV return has outperformed UK equities since IPO, delivering a total return of 9.5% p.a. to 30 September 2018. The team performed a ten-year review of the various drivers of returns since inception to 31 March 2016. InfraRed believes that the NAV was ahead of forecast by 44.2p, of which 30p was due to “alpha” (or portfolio outperformance derived from the actions of the manager), and 14.2p due to “beta” (or economic factors such as a decline in corporate tax rates, and discount rates declining). The company continues to deliver solid and consistent positive returns. However, infrastructure investment risks, as well as the value of having an experienced manager behind the wheel, were shown in early 2018 with the insolvency of Carillion which in time (after the dust has cleared) is currently expected to have had an impact on NAV of around 1%.

Distributable income, net of costs, according to the manager, is expected to cover the dividend. The Carillion insolvency has meant that income from several of the related projects has been “locked-up” within the special purpose vehicles (SPVs) through which projects are held, which meant that dividend cover for the six months to 30 Sept 18 reduced to 1.06x (excluding the one-off impact of profits from disposals).

William Heathcoat Amory
William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has over 20 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.
Kepler View

The twelve-year history of HICL illustrates why infrastructure investing has proven so attractive for long term investors – both in the consistency of returns, but also the lack of correlation to equity markets. In fact, the consistency of positive annual returns illustrates the parallel with the tortoise and hare. Over the short term, equity markets might easily show HICL a clean pair of heels, but over a cycle, HICL has proven itself an impressive adversary on a total return basis.

HICL suffered some negative share price pressure in early 2018, but Equitix’s unsolicited bid for John Laing Infrastructure catalysed interest once more. HICL has regained some of its poise in terms of rating, but the current share price premium of c 5% is below the average seen over a longer time frame. Certainly, the political situation will be holding some buyers back, but HICL remains the pre-eminent vehicle for investors to get access to lower-risk infrastructure assets.

Using the director’s valuation discount rate of 7.2%, we can estimate an IRR for HICL based on the current share price premium, of c 5.7%. This is the internal rate of return one might expect from HICL, if held to “maturity”. Deviations from this, could be a result of “alpha” delivered by the manager, the manifestation of portfolio risks (downsides) or changes to underlying valuation assumptions. According to the manager, the portfolio is most sensitive (in terms of a 50bps shift in the long-term rate) to changes in the discount rate and inflation assumptions.


Bull
Bear
Lower risk, institutional quality infrastructure assets, within a vehicle that has scale
Labour government could cause significant uncertainty
Steady yield, with board guidance on dividends 2.5 years out
Rising discount rates, in absence of inflation and / or increases in deposit interest rates, could limit manager’s ability to continue to deliver positive NAV progression
Uncorrelated returns to equities, with long term IRR estimate of 5.7% at current share price
Exposure to third party facilities management companies in event of their insolvency
Continue to Portfolio
2022 Kepler Alternative Income Rated Fund

This trust has been awarded a rating by Kepler Trust Intelligence for alternative income... Find out more

Fund History

11 May 2022 Catch a tiger by the tail
As inflation bites harder than it has for decades, we consider the best ways for investors to hang on to their capital...
04 May 2022 Time to change the record
We ask whether equities can still offer meaningful diversification or whether investors need to turn to alternatives…
09 Mar 2022 Private markets: A closer look at infrastructure and renewables
We examine the £27bn listed Infrastructure and Renewable Energy Infrastructure sectors…
21 Dec 2021 Fund Analysis
Cash covered dividend and link to inflation underlines HICL’s appeal…
01 Dec 2021 How to protect your portfolio from inflation
We highlight trusts which could appeal in an environment where 'transient' inflation is here to stay...
16 Jun 2021 Fund Analysis
Covered dividend target this year means HICL looks less expensive than peers…
12 May 2021 Riders on the storm
We look at the yields in the alternatives space and how they have been affected by the pandemic…
20 Jan 2021 Kepler's top-rated investment trusts for 2021
We update our annual quantitative ratings for investment trusts…
09 Sep 2020 Time to switch horses?
We look at what returns are likely from equity markets in the coming decade and identify which alternatives could offer similar or greater returns for lower levels of risk…
13 Aug 2020 Fund Analysis
HICL offer institutional quality infrastructure assets, delivering an attractive income...
23 Apr 2020 Sucker punch
Two of our analysts debate the merits of equity income and alternative income trusts at this point in time...
29 Oct 2019 Fund Analysis
Institutional quality infrastructure assets, delivering an attractive income...
09 Oct 2019 Bond proxy?
As a replacement or complement for longer duration bonds, listed alternative income funds look an interesting, well… alternative..
06 Mar 2019 Stairway to heaven
Our research shows that reinvesting the income generated by alternative assets could add a significant boost to long-term portfolio performance…
14 Feb 2019 Fund Analysis
Predictable cashflows, uncorrelated to the economic cycle
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