2 June 2020

The long term diversifier still paying dividends

Head of Charities, Mark Powell reviews the infrastructure sector as an asset class, which the JM Finn charities team have been increasing exposure to over the last ten years, as they sought to diversify away from gilts, bonds and equities.

by Mark Powell

Head of Charities


The yield on bonds and gilts has continued to fall post the Global Financial Crisis of 2008/9, and following the most recent tumble as a result of the coronavirus pandemic, 10 year UK government debt now yields just 0.2% (i.e. you will receive only 0.2% per annum over the 10 years before the UK government redeems this issue). 

The charities team at JM Finn identified over 10 years ago that infrastructure assets, many of which have income streams guaranteed by local or central governments, offer bond like income returns with the potential for capital gains. Indeed, with the yield on bonds and gilts falling and interest rates also decreasing (the ‘lower for longer’ theme), the attractiveness of this asset class has increased markedly. 

To highlight this, very few of the UK water companies are now publicly listed companies, most have been bought by infrastructure, private equity or sovereign wealth funds, as these investors are attracted by the secure income streams and regulated businesses. Airport, energy transmission lines (electricity, gas, pipelines), hospitals, railways and toll roads all have similar characteristics.

Some investors have scrutinised, or indeed overlooked, the sector believing infrastructure was expensive, often on premiums to the value of their assets or cash flows, that the infrastructure asset class remained immature and had not been properly tested over a full cycle, and that liquidity (in buying and selling the shares or units) was poor and again not properly tested.  As stock markets have fallen back sharply as a result of the global coronavirus pandemic, this feels like an opportune time to review the sector and its recent performance.

Perhaps we should begin by looking at the funds which the team has invested in as at the end of December 2019. It is important to remember that past performance is not a guide to future performance and that these funds are used for indicative purposes and may not be suitable as individual circumstances and investment horizons might well preclude these funds as an appropriate investment.  It is also worth noting that the funds in the table are a selection of funds and are not entirely representative of the sector; other comparable funds not covered here may not have performed in a similar manner and may not do so in the future.

Fund

Type of Fund

3 year performance

5 year performance

5 year annualised performance

3i Infrastructure

Private-equity style

+66.3%

+125.3%

+18.5%

BBGI

PFI/PPI assets

+38.4%

+66.9%

+11.4%

Greencoat UK Wind

UK onshore and offshore wind

+47.2%

+79.6%

+13.8%

Foresight Solar

Predominantly UK solar

+41.8%

+61.7%

+12.3%

The Renewables Infrastructure Group

Wind, solar and battery assets across Europe

+50.5%

+81.8%

+14.6%

First State Global Listed Infrastructure Fund

Global listed infrastructure equity fund

+27.3%

+71.8%

+8.4%

Lazard Global Listed Infrastructure Fund

Global listed infrastructure equity fund

+24.1%

+63.2%

+10.3%

FTSE All-Share Index

UK equity market index

+8.4%

+44.2%

+7.6%

FTSE UK Gilt Index

UK gilt market index

+9.5%

+21.8%

+4.0%

All data total returns, as at 31/12/2019

Source: Bloomberg

 

All of the funds, bar one have a 5 year annualised return of over 10% per annum, ahead of the FTSE All-Share Index’s 5 year annualised return of +7.6% and the FTSE UK Gilt Index’s 5 year annualised return of +4.0%.  These returns highlight our view that infrastructure has provided solid compound returns over the past few years, helping to diversify portfolios away from the traditional fixed income and equity asset classes.

Turning to the present, we have looked at the performance of the same funds from the market close on the 31st December 2019 to the market close on Monday 26th May 2020, which is almost exactly two months since the market lows of the 23rd March (performance is again in total return:

Fund

Type of Fund

Year to date performance

Income Yield

3i Infrastructure

Private-equity style

-3.6%

3.2%

BBGI

PFI/PPI assets

+0.4%

4.3%

Greencoat UK Wind

UK onshore and offshore wind

-1.9%

4.9%

Foresight Solar

Predominantly UK solar

-11.7%

6.3%

The Renewables Infrastructure Group

Wind, solar and battery assets across Europe

-7.1%

5.3%

First State Global Listed Infrastructure Fund

Global listed infrastructure equity fund

-6.1%

3.2%

Lazard Global Listed Infrastructure Fund

Global listed infrastructure equity fund

-10.6%

3.3%

FTSE All-Share Index

UK equity market index

-18.9%

 

FTSE UK Gilt Index

UK gilt market index

+8.7%

 

Source: Bloomberg

As we know the FTSE All-Share has fallen -18.9% and the FTSE UK Gilt Index has risen +8.7% and the selected infrastructure funds have returned between +0.4% and -11.7%.  This data highlights that they have all performed better than the UK equity market as a whole so far during this highly challenging year, although only BBGI has generated a positive return. Furthermore, what is critical is that during this period of dividend cuts and suspensions, none of the funds have so far announced reductions in their dividend payments.

The above quick analysis illustrates the effectiveness of a long-standing allocation to infrastructure assets and how our increasing allocation to this asset class over the past 10 years has helped us generate solid income and capital returns whilst helping to diversify portfolios.

Please note that the value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future performance. Any views expressed are those of the author.


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