Are infrastructure funds a sensible alternatives to bonds?

Apodemus

Audaxer said:

Another IT I like the look at for income is The Renewables Infrastructure Group (TRIG) which is also yielding around 5%, and has an even higher premium of around 20%. Is there anything wrong with buying good ITs at fairly high premiums to bring a bit more diversification to an income portfolio? 

While I agree with the attraction of such ITs (I have JLEN and BSIF in my SIPP), I'm not sure that I completely trust the NAVs of this type of IT.  At present most of the returns are from easily predictable, fixed-rate, forward income (ROCs, FITs and long-term fixed-price sales) but all of these companies need to transition to a more variable and short-term pricing model at the same time as replacing ageing infrastructure.  The market is certainly set to grow and costs are rapidly falling but I would expect that the landscape will also get much more competitive.  This all adds up to difficulties in pricing the future income stream into the current value of the assets and this is borne out by the very wide range of variation on the assumptions shown in the calculation of NAV in the financial statements.

Also, the need for these ITs to have a long-term focus on their future income stream is quite reminiscent of previous scrambles by the oil majors to beef up their pool of proven reserves.  While the oil companies certainly do a lot of exploration, they are also quite used to simply swallowing up the minnows in the business to achieve an immediate growth in future oil flow.  I would think a similar consolidation might occur in the renewables industry and we can't rule out the oil majors joining in as a way of repositioning themselves away from the Carbon economy.  The total market cap of TRIG is roughly equal to 10% of RDSBs current annual capital investment...   

PeteinSQ

bowlhead99 said:

Malone2020 said:

Someone mentioned a discount above. Can I just please clarify what exactly the % of any discount is and how it is measured (so against pre March slump price, 52 week high, book value)? 

In the context of an investment trust or listed investment company, a 'discount' or 'premium' doesn't relate to previous market prices; it simply refers to the percentage difference between the most recent published book value of net assets per share ('NAV') and the share price per share. If the NAV at end of March was 152p and a dividend of 2p per share has since become payable, the theoretical remaining NAV is 150p per share, so if they are trading at 200p per share that's a 33% premium and 100p per share would be a 33% discount to that last known NAV.

For investment companies holding assets which don't have daily published values (rather than a porfolio of stockmarket listed shares whose price could be pulled off a screen every afternoon), the NAVs will be released less frequently than daily. HICL only provides a full report each March and September, as it's not practical to evaluate a portfolio of private assets on a daily basis. In between, it will occasionally release news or trading updates.  But when you see a share price of 140p or 160p against a several-months old NAV of 150p, you know that old NAV is 'stale' anyway. The real NAV (as of the day you're considering buying or selling a share on the stock exchange) will have moved on from 150p based on how the market and business conditions are looking for the underlying assets, the effects of additional fundraisings etc.  However, the 'real NAV' is not published in real time.

So, naive investors might be looking at today's share price of 166p and thinking that's a premium to what the assets are really worth because they were last told that the assets were worth 150p. Whereas professional investors might have considered the likely positions of the underlying businesses, market multiples paid for listed companies comparable to some of those businesses, the movement in interest rates that would be used within discounted cashflow analysis when valuing some of the businesses,  and the fact that there was a successful fundraising at 164p a couple of months ago; they may consider today's 166p to really represent a discount to their own guesstimate/ assessment of a current underlying NAV of 170p, so they think they are getting it for a discount rather than paying a premium.

It will be late November before HICL actually publish their 30 September NAV, but by the time that information is available to inform decisions, you would be eight weeks too late to actually be able to buy or sell a share for the 30 September stock exchange price.

When they publish their new NAV is there a share price correction - or do most large investors tend to trust their own calculations as to what the NAV should really be and disregard the NAV put forward by the fund? 

bowlhead99

PeteinSQ said:

bowlhead99 said:

Malone2020 said:

Someone mentioned a discount above. Can I just please clarify what exactly the % of any discount is and how it is measured (so against pre March slump price, 52 week high, book value)? 

In the context of an investment trust or listed investment company, a 'discount' or 'premium' doesn't relate to previous market prices; it simply refers to the percentage difference between the most recent published book value of net assets per share ('NAV') and the share price per share. If the NAV at end of March was 152p and a dividend of 2p per share has since become payable, the theoretical remaining NAV is 150p per share, so if they are trading at 200p per share that's a 33% premium and 100p per share would be a 33% discount to that last known NAV.

For investment companies holding assets which don't have daily published values (rather than a porfolio of stockmarket listed shares whose price could be pulled off a screen every afternoon), the NAVs will be released less frequently than daily. HICL only provides a full report each March and September, as it's not practical to evaluate a portfolio of private assets on a daily basis. In between, it will occasionally release news or trading updates.  But when you see a share price of 140p or 160p against a several-months old NAV of 150p, you know that old NAV is 'stale' anyway. The real NAV (as of the day you're considering buying or selling a share on the stock exchange) will have moved on from 150p based on how the market and business conditions are looking for the underlying assets, the effects of additional fundraisings etc.  However, the 'real NAV' is not published in real time.

So, naive investors might be looking at today's share price of 166p and thinking that's a premium to what the assets are really worth because they were last told that the assets were worth 150p. Whereas professional investors might have considered the likely positions of the underlying businesses, market multiples paid for listed companies comparable to some of those businesses, the movement in interest rates that would be used within discounted cashflow analysis when valuing some of the businesses,  and the fact that there was a successful fundraising at 164p a couple of months ago; they may consider today's 166p to really represent a discount to their own guesstimate/ assessment of a current underlying NAV of 170p, so they think they are getting it for a discount rather than paying a premium.

It will be late November before HICL actually publish their 30 September NAV, but by the time that information is available to inform decisions, you would be eight weeks too late to actually be able to buy or sell a share for the 30 September stock exchange price.

When they publish their new NAV is there a share price correction - or do most large investors tend to trust their own calculations as to what the NAV should really be and disregard the NAV put forward by the fund? 

When they release the NAV it will be accompanied with a half-yearly report which will not just show the NAV but the whole balance sheet, p&l etc and discuss portfolio progress as well as prospects. 

So it is like any stock market listed company issuing an annual or interim report - sometimes there can be an immediate share price reaction, sometimes a delayed reaction as the news 'sinks in' in the context of other market news coming out, and sometimes no reaction at all. If the average amounts of money people would be willing to pay to buy - or want to receive to sell - a share in the company is not really changed by the new information (because the current price still 'looks about right') then the share price won't really change.    The fact that, 'two months ago, the NAV was actually 170p but the market was willing to pay 175p for a share at that time' does not necessarily mean that the market participants were wrong to pay 175p for access to the investment at that time, compared to other opportunities they had, or that the share price people are paying today is 'wrong'. So a revelation about the NAV does not always create a price change - unless it's radically different from what people with enough money to move the markets thought the NAV really was when they were making their decisions a few hours earlier.

When you see something trading at a premium to its last reported NAV, you may think that the price should fall and then you would be happier to buy in. But in the absence of other investments with similar characteristics to (e.g.) HICL's portfolio offering a 'better return' than HICL, the share price of HICL does not necessarily need to fall, even if its NAV turns out to be lower than people had previously assumed. 

What constitutes a 'better return' would be looked at from the investor's perspective and be in the eye of the beholder - as some investors who make up the market would have a preference for growth, others income, others a lack of volatility, others a correlation or lack of correlation with an asset class, sector or currency etc.  So there is quite a lot of judgement to be applied, and the money-weighted average of whether the market participants think there are better comparable opportunities available is what will ultimately sustain the price, or drive it down or up.

Audaxer

bowlhead99 said:

Malone2020 said:

Someone mentioned a discount above. Can I just please clarify what exactly the % of any discount is and how it is measured (so against pre March slump price, 52 week high, book value)? 

In the context of an investment trust or listed investment company, a 'discount' or 'premium' doesn't relate to previous market prices; it simply refers to the percentage difference between the most recent published book value of net assets per share ('NAV') and the share price per share. If the NAV at end of March was 152p and a dividend of 2p per share has since become payable, the theoretical remaining NAV is 150p per share, so if they are trading at 200p per share that's a 33% premium and 100p per share would be a 33% discount to that last known NAV.

For investment companies holding assets which don't have daily published values (rather than a porfolio of stockmarket listed shares whose price could be pulled off a screen every afternoon), the NAVs will be released less frequently than daily. HICL only provides a full report each March and September, as it's not practical to evaluate a portfolio of private assets on a daily basis. In between, it will occasionally release news or trading updates.  But when you see a share price of 140p or 160p against a several-months old NAV of 150p, you know that old NAV is 'stale' anyway. The real NAV (as of the day you're considering buying or selling a share on the stock exchange) will have moved on from 150p based on how the market and business conditions are looking for the underlying assets, the effects of additional fundraisings etc.  However, the 'real NAV' is not published in real time.

So, naive investors might be looking at today's share price of 166p and thinking that's a premium to what the assets are really worth because they were last told that the assets were worth 150p. Whereas professional investors might have considered the likely positions of the underlying businesses, market multiples paid for listed companies comparable to some of those businesses, the movement in interest rates that would be used within discounted cashflow analysis when valuing some of the businesses,  and the fact that there was a successful fundraising at 164p a couple of months ago; they may consider today's 166p to really represent a discount to their own guesstimate/ assessment of a current underlying NAV of 170p, so they think they are getting it for a discount rather than paying a premium.

It will be late November before HICL actually publish their 30 September NAV, but by the time that information is available to inform decisions, you would be eight weeks too late to actually be able to buy or sell a share for the 30 September stock exchange price.

Thanks bowlhead, that's interesting, I didn't know that the NAV may be a couple of months out of date. 

Thrugelmir

Infrastructure funds are trading at significant premiums. As an asset class worth tracking and waiting for temporary moments of weakness. Earlier this year you could pick JLEN up at a 10% discount for example. 

Audaxer

ColdIron said:

Audaxer said:

ColdIron said:

PeteinSQ said:

ColdIron said:

PeteinSQ said:

Why do they fall in value during a crash? Isn’t the money all owed by governments and local government and therefore pretty much guaranteed? 

HICL is an Investment Trust so it can trade at a premium or discount. During March it's NAV was largely unchanged but it swung from a roughly 15% premium to a 10% discount. Investor sentiment

Thanks for this. I've seen that they all have a NAV - do they calculate that themselves? Clearly I'm not in a position to decide if their calculations are correct.

The NAV is a composite of the investments held by the trust so it depends what those assets are. Liquid and frequently traded shares are easy to determine, illiquid assets that may only be valued quarterly and may involve an element of estimation, less so. And then there is misrepresentation

On the face of it you'd say if it's trading at a discount you should pile in but there's clearly more to it than that.

Indeed, you need to know why a trust is trading at a discount and take a view

HICL has pretty much always traded at a premium until a few years ago when John McDonnell stated his intention to return PFI assets to public ownership. Many argued that this expensive policy would be low on the list of priorities compared to cheaper higher profile flagship policies but HICL moved to a discount. It was followed up by Stella Creasy who argued that Corporation tax was higher at the time of PFI and the trusts had received a windfall so she proposed a windfall tax. This was much more realistic and the discount widened because investors were spooked. In hindsight those would have been a good times to invest but it didn't feel like it at the time

Compare and contrast to Woodford Patient Capital, a trust that traded at an even deeper discount so would have been an even better buy?

It's important to understand why a trust is trading at the price that it is rather than just piling in because you are getting a bunch of shares at an apparent bargain price

I like the look of HICL and wish I had taken the plunge a few months ago when the price was lower, but with a yield of around 5%, I think it still may be good time to buy, despite a premium of around 10%. Another IT I like the look at for income is The Renewables Infrastructure Group (TRIG) which is also yielding around 5%, and has an even higher premium of around 20%. Is there anything wrong with buying good ITs at fairly high premiums to bring a bit more diversification to an income portfolio? 

I bought HICL for my drawdown SIPP in May 2017 when the price, NAV and premium were pretty much where they are today so my position is flat and in line with my expectations. I've had three years of income from the dividends which is why I bought them and they do provide some diversification from equities and fixed income. Some ITs seem to trade at an almost permanent premium so unless you wait forever you might just have to bite the bullet. But if you don't need the income now perhaps you could take the opportunity to keep a close eye on them until you do

Thanks. If I bought it and it continued to pay a growing income over many years, I wouldn't be too bothered about the share price and NAV, so maybe as a diversifier from equity income funds/ITs and fixed income funds it would still be a good option.

Audaxer

Thrugelmir said:

Infrastructure funds are trading at significant premiums. As an asset class worth tracking and waiting for temporary moments of weakness. Earlier this year you could pick JLEN up at a 10% discount for example. 

I see that like HICL, the JLEN share price fell in March which resulted in that discount. I could wait for another price drop in HICL to buy at a cheaper price, but I could be waiting a long time and lose more in missed dividends. Anyway, isn't waiting for the share price to fall and the IT to move to a discount, just trying to time the market, which we are constantly told doesn't work? 

bowlhead99

Audaxer said:

Thrugelmir said:

Infrastructure funds are trading at significant premiums. As an asset class worth tracking and waiting for temporary moments of weakness. Earlier this year you could pick JLEN up at a 10% discount for example. 

I see that like HICL, the JLEN share price fell in March which resulted in that discount. I could wait for another price drop in HICL to buy at a cheaper price, but I could be waiting a long time and lose more in missed dividends. Anyway, isn't waiting for the share price to fall and the IT to move to a discount, just trying to time the market, which we are constantly told doesn't work? 

On the one hand, buying assets at a 'discount' sounds like a great idea. 

On the other hand, if the other market participants think that the assets are not as desirable as they had thought they were sometime earlier, and you do not know the infrastructure sector or the particular portfolio assets better than all the other analysts out there whose opinions move the prices, it does not seem that waiting until nobody wants to pay as much for the shares means you are necessarily 'getting a bargain', even if the price is cheaper. 

Sure, if there is a global pandemic that rattles the markets and the share price holds up OK for a bit and then temporarily plummets before the fund manager writes some reassuring statement and global QE, interest rate and bailout efforts give investors confidence again to support a bounceback in price, you might be able to grab a bargain in the window in between. You might also need to wait a long time for it, and end up getting the timing wrong.

Thrugelmir

Audaxer said:

Thrugelmir said:

Infrastructure funds are trading at significant premiums. As an asset class worth tracking and waiting for temporary moments of weakness. Earlier this year you could pick JLEN up at a 10% discount for example. 

I see that like HICL, the JLEN share price fell in March which resulted in that discount. I could wait for another price drop in HICL to buy at a cheaper price, but I could be waiting a long time and lose more in missed dividends. Anyway, isn't waiting for the share price to fall and the IT to move to a discount, just trying to time the market, which we are constantly told doesn't work? 

I class JLEN etc as alternative investments rather than pure equities. A useful diversifier in ones portfolio. In the main uncorrelated to the "market". Would you be prepared to buy at a 20% premium to asset value, or would you simply move on to something else on your watch list. Looking for better value elsewhere. What appears to be high dividend yield shouldn't be the only reason to invest. 
Follow individual share prices and you maybe surprised at the volatility beneath the static market indices. EMH is an imperfect science as you move down the market capitalisation scale.