HICL Infrastructure Company: June 2021 update

• The trust aims to provide a sustainable income for investors over the long term
• NAV total return has increased from 1.9% in 2020 to 5.5% in 2021
• InfraRed Capital Partners has almost three decades of experience in the industry
• A target dividend of 8.25p per share is expected to be maintained for 2022 and 2023, but this isn’t guaranteed

How it fits in a portfolio

This trust aims to provide investors with a stable, sustainable income over the long term. It invests in infrastructure assets that are vital to communities, covering sectors like transport, utilities and healthcare.

Some of the sectors it invests in are in demand no matter what’s happening in the economy, meaning their prices normally increase – often in line with inflation – without affecting demand too much. This trust could diversify an income-focused portfolio. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to NAV.

Manager

InfraRed Capital Partners is the investment manager for HICL Infrastructure Company and are responsible for the day-to-day management of the trust. They’ve been investing in infrastructure and property since 1990 and Harry Seekings is the head of their infrastructure investment business. He’s supported by a team of over 100 infrastructure professionals with an average of 12 years’ experience in the industry.

Process

The trust invests heavily in the UK, making up 74%, with the rest invested across Europe and North America. The managers look to invest in infrastructure that plays a significant role in the wellbeing of communities, in turn helping drive sustainable income for investors over time.

The portfolio can be broken down into three main buckets; Public-Private Partnerships (PPP) Projects, Demand-based Assets and Regulated Assets.

PPP Projects are where companies and government work together to build, maintain and fund public services, such as schools, roads or hospitals. Investments in these projects represent around 71% of the portfolio and are typically considered lower risk by the managers as they are backed by the government. As with any investment though, there’s always risk involved.

Towards the end of 2020, the managers invested in Directroute Holdings limited, which is responsible for the M17/M18 motorway in Ireland. The managers felt it was a good opportunity to add a high-quality PPP project to the portfolio. More recently, they decided to sell the South East London Police Stations PPP Project, as it was priced at a premium.

Demand-based Assets provide a useful balance to PPP Projects as they are generally less sensitive to certain political or regulatory risks but are typically more impacted by the state of the economy.

They currently make up 19% of the portfolio and are mainly accounted for by three assets – High Speed 1, Northwest Parkway and A63 Motorway. Each suffered with the impact of the coronavirus, as travel restrictions led to massive declines in traffic flows and demand for their services. The managers feel they are still well placed though to take advantage of the economic recovery, as vaccines are distributed and restrictions are lifted.

Regulatory assets represent around 10% of the portfolio and are infrastructure assets that are deemed essential, such as water or gas utilities. These types of services are needed regardless of what’s happening in the economy. As a result, their prices can normally be increased – often in line with inflation – without affecting demand too much.

In order to continue supporting the UK’s transition to a net zero carbon economy, the managers invested in Walney Extension Offshore Wind Farm. As we are seeing an increased awareness for these types of assets, they have been performing well within the portfolio and offer an extra layer of diversification.

The trust has the flexibility to use derivatives and gearing both of which can magnify any gains or losses. Investors should be aware that if used, both can increase risk.

Culture

HICL Infrastructure Company launched in 2006 and was the first infrastructure investment company to be listed on the London Stock Exchange. The team behind the trust, Infrared Capital Partners, can trace its roots back to 1990, when it was established as a part of Charterhouse Bank with a focus on real estate.

Investing sustainably is central to HICL and Infrared's culture. The managers ensure each company they invest in takes responsibility for its environmental, social and governance (ESG) impacts, risks and opportunities. They want to see companies with a clear social purpose, with a desire to positively impact the environment now and for future generations and the drive to benefit the communities where their infrastructure is located.

Cost

The ongoing annual charge over the trust’s financial year to 31 March 2021 was 1.07%, compared to 1.11% the previous year. Investors should refer to the latest annual reports and accounts, and Key Investor Information for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. Our platform charge doesn’t apply if held in a Fund and Share account.

Performance

Despite the volatility created by the coronavirus, the trust had a fairly good year. Over 12 months, up to March 2021, it returned 7.7% for investors. Past performance is not a guide to the future. The managers were also able to declare the full year dividend at 8.25p per share, with a target set to keep it the same for both 2022 and 2023. The trust’s dividend yield is currently 4.8%, although yields are variable and not a reliable indicator of future returns.

The trust held up well during the pandemic, mainly due to the defensive nature of some of the infrastructure assets they invest in. Utilities company Affinity Water performed well over the year as its services were in high demand despite the virus and it was also able to benefit from the price control changes following a review by the Competition and Markets Authority (CMA). The increased demand and awareness for sustainable and renewable investments also saw the trust’s offshore transmission assets perform well.

Not all investments held up well though. The infrastructure companies that make up the Demand-based assets bucket were all hit hard by the coronavirus, as travel restrictions saw reduced traffic volumes. For example, High Speed 1’s primary source of revenue, granting certain train operators’ access to their rail network, has dropped around 88% compared to pre-pandemic levels. As the easing of restrictions around domestic and international travel are still not guaranteed, the managers see it taking until the end of 2022 to get back to normal levels.

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2021.

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HICL Infrastructure Company Limited KEY INVESTOR INFORMATION