Martin Bixel - 26 Sep - 0 Comments
We outline the opportunities in infrastructure and renewable energies
Private investors mulling over where to place this year’s allocation of Isa money may want to consider options outside the mainstream. There are a range of popular investments that offer you the chance to put money into areas such as infrastructure and renewable energy.
This week investors rushed to secure a slice of the £260 million of shares from the HICL Infrastructure investment trust in an offer that was almost three times oversubscribed. Many of these funds offer decent yields for income-hungry investors, but it’s important to understand what these funds do before you part with your cash.
These funds buy and operate projects such as schools, hospitals and roads. Many of the projects are financed by Private Finance Initiative (PFI) deals, which typically run for 20 to 25 years.
Simon Elliott of Winterflood Securities, the stockbroker, says infrastructure funds offer solid income at a time of rock-bottom interest rates. “The average yield on these funds is 4.6 per cent, which is attractive, and in many cases the money to run the projects comes ultimately from the public sector, so it provides a secure income stream.” Mr Elliott says that while performance so far has been good, the structure of PFI deals can pose a problem for infrastructure funds.
He says: “At the end of the 20 or 25-year term the funds don’t own the schools or hospitals they have been running and must keep searching for fresh projects to manage.”
If they don’t succeed in replacing old deals, their value will steadily decline to zero as each PFI deal ends, although most funds have been quite good at acquiring new assets. Iain Scouller of Stifel, the stockbroker, says another problem is that funds are having to look overseas to top-up their holdings because fewer projects are being created in the UK; this is difficult to do and carries foreign exchange risk.
Renewable energy and environmental funds
These funds aim to invest in projects or stocks that are involved in environmental activities or renewable or alternative energies.
Colette Ord of Numis Securities, the stockbroker, says: “Renewable energy trusts offer a higher yield than traditional infrastructure funds, paying about 6 or 7 per cent. Typically they will get 50 to 60 per cent of their income from subsidies, which are inflation-linked, and the remainder from sales of energy. The deals tend to last between 20 and 25 years, so are quite long term. The downside is that the level of revenue from subsidies and energy prices could fall over this period, and the British weather is unpredictable.”
Mr Elliott says the reasons for investing in the environmental sector include an increasing population, rising living standards, finite natural resources and pollution.
“Technological innovation is a key element of the story and the most successful managers in this space will be those who can anticipate changes and seek to take advantage of them.”
Ewan Lovett-Turner of Numis Securities says private equity funds focus on financing and developing small, growing companies that they will float on the stock market or sell to another buyer. He says: “This is an area to which the ordinary private investor would struggle to obtain access other than through a private equity fund. The rewards can be substantial, although the performance gap between different funds is quite wide, so you need to choose carefully.”
He says the funds tend to pay decent dividends, often produced by sales of companies in the fund portfolio.
Mr Scouller says that many private equity funds trade at a discount to their real, or net asset value so they are attractively priced, and earnings growth has been pretty good. A potential downside, he says, is that the underlying companies in which private equity funds invest tend to be heavily loaded with debt.
“A typical company might be made up of 50 per cent equity and 50 per cent borrowing and this level of borrowing can be a problem in a downturn,” he says.
Mr Lovett-Turner says that investors can earn a decent yield by putting money into more esoteric types of investment rather than conventional government and corporate bonds.
One example is floating rate loan notes, a type of bond that gives you a higher rate of interest as rates rise, and a correspondingly lower one as they fall.
Another is loans that are less easily traded than conventional bonds and are therefore too illiquid for putting into a typical mainstream bond fund.
Some alternative debt funds also include high-yield bonds in their portfolio, even though they are at the high-risk end of the conventional bond range.
The experts’ picks
Simon Elliott goes for HICL Infrastructure Company. He says: “The trust has prospered through different market cycles. It has a yield of 4.6 per cent.” Iain Scouller selects Sequoia Economic Infrastructure. He says: “It invests in economic infrastructure debt which includes utilities, roads and shipping. It has a 5.5 per cent yield.”
Renewable energy funds
Colette Ord favours Bluefield Solar Income. She says: “It has a higher than average yield of 6.6 per cent and is the only fund in the sector that has been able to secure long-term, low-cost borrowing.” Mr Elliott likes John Laing Environmental Assets. “It invests in a range of activities, including wind and solar energy, and waste and water management, and yields 5.6 per cent.”
Ewan Lovett Turner picks Princess Private Equity. He says: “It invests in a broadly based global portfolio and yields 5.7 per cent.”
Mr Elliott goes for Impax Environmental Markets. He says: “It has the longest track record in the sector and a yield of under 1 per cent.”