Infrastructure for income

One of the best-selling investment trusts on the Fidelity Personal Investing platform in March was HICL Infrastructure, which owns a portfolio of core assets in the UK and elsewhere. Like many of its peers, it has been out of favour for some time, yet the underlying earnings are very reliable and support an attractive dividend that should appeal to income seekers.

Where does it invest?

HICL invests in core infrastructure, which is defined as essential real assets that deliver resilient cash flows from a protected market position. These generate stable revenues and benefit from monopolistic characteristics such as high barriers to entry that limit any potential competition.

There are more than 100 different assets with around two-thirds by value located in the UK, a fifth in the EU and the rest divided between the US and Australasia. They include transport links like the A63 in France, health facilities such as Southmead Hospital in the UK, as well as electricity and water infrastructure, with the largest example being Affinity Water.

One of the key attractions of the portfolio is that 83% of the revenue is either contracted or regulated, with just 17% being demand-based¹. The latter is the only element that is sensitive to the level of activity in the economy, which suggests that the cash flows should be resilient in the event of a recession.

Disposals supporting share buybacks

It is important to appreciate that the underlying assets are illiquid and don’t normally change hands. This means that the valuations are largely based on complex models that rely on assumptions about future interest rates and levels of inflation.

Shares in HICL are currently trading 22% below net asset value (NAV), yet it has successfully sold over £500m of assets at or above their carrying values. The majority of the proceeds have been used to pay down debt, with gearing expected to fall to just 7%, although £50m has been allocated to a share buyback programme that is intended to narrow the discount.²

What are the manager’s latest views?

In the interim update that covered the 5 months to the end of February, the manager said that the market for high quality core infrastructure assets remains in good health with increasing transaction volumes noted in the period.

“This data, supported by the Company’s own disposals, continues to reaffirm market liquidity and the observed disconnect between public market and private investor valuations for inflation correlated core infrastructure.”

Consistent dividends

The trust is on track to deliver its target dividend of 8.25p for the financial year to 31 March 2024, which based on the current share price gives it an historic yield of 6.7%.³ Please note this is not guaranteed. It has maintained the same level of income for a number of years due to the fact that some of its assets are non-distributing, with an update expected in the annual accounts.

How has it performed?

Since the initial public offering (IPO) in 2006, HICL has delivered a total shareholder return of 8.7% per annum⁴ based on NAV appreciation and dividends paid. The latter accounts for the lion’s share of this, which is why it will mainly appeal to investors who are looking for a reliable source of income.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in the trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.