Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
If the Bank of England continues to reduce interest rates it could increase the appeal of high-yielding assets like infrastructure. Many of the investment trusts that operate in this area offer a stable, but steadily increasing stream of dividends that could become a lot more sought after by income investors.
A good example is International Public Partnerships (INPP), which is a member of Fidelity’s Select 50 list of handpicked funds. The £2.5bn trust owns a diversified portfolio of essential assets and is managed by a highly experienced and well-resourced team that specialises in these sorts of holdings.
Objective and approach
INPP invests responsibly in social and public infrastructure that provides shareholders with stable, long-term, inflation-linked returns, based on growing dividends and the potential for capital appreciation. The holdings are intended to meet societal and environmental needs both now and in the future and are generally owned for the life of the asset.1
When the trust first listed in 2006 its initial portfolio consisted of 22 investments in the education, health, government office, judicial and transportation sectors. That figure has now grown to 144, with 72% by value located in the UK and the rest spread around the world.2
Diversified and resilient portfolio
The portfolio can be divided into three broad categories, with the regulated assets being the largest allocation at 50%. These are designed to protect the interests of consumers while ensuring that the holder earns a fair return on their capital, with examples including the Tideway sewer project under the river Thames and Cadent, the UK’s largest gas distribution network.3
Next on the list are the Public Private Partnerships (PPPs), which are individual concession-based investments where a private sector company is responsible for operating and maintaining a social infrastructure facility in return for availability-based revenues. These account for a further 40% of the portfolio, with the other 10% being operating businesses like Angel Trains, a rolling stock leasing company.4
Attractive source of income
The Board has announced that it plans to increase the dividend by 3% in the 2024 financial year to 8.37 pence per share. It will then resume its long-term growth rate of 2.5% that it has maintained since the IPO, with the distribution in 2025 expected to be 8.58p. This gives the shares a prospective yield for next year of around 6.6%. Please note this yield is not guaranteed.5
INPP has recently announced that it will increase the frequency of its dividend payments, from semi-annually to quarterly, starting in 2025. This will provide investors with a more regular income stream and bring it into line with its peers.
Outlook
International Public Partnerships aims to pay a dividend that grows sustainably over the long-term, while remaining fully covered by net operating cash flows. The portfolio’s revenues typically increase by 0.7% for each 1% rise in inflation and based on the projected receipts, it should be able to meet its progressive dividend policy for at least the next 20 years, even if no further investments are made.6
The Board believes that the current share price materially undervalues the company, as it implies a projected net return of 9.3% per annum. They consider this to be attractive as it is a full 4.6% more than that offered by a 30-year UK government bond.7
Writing in the interim accounts at the end of June, the chairman said that governments have a pressing requirement to renew and expand public infrastructure, but continue to be fiscally constrained. “The potential for the company to assist in the development and funding of new infrastructure should provide the company with highly attractive growth opportunities in the longer term.”8
Discount and buybacks
Like many other alternative investment trusts, INPP shares have slipped to a wide discount to NAV that currently stands at 13%. The Board is actively taking steps to improve matters and has recently announced an increase in the share buyback programme to £60m that has been extended to the end of the first quarter next year.
As part of its disciplined approach to capital allocation, the trust has completed £235m of disposals in the last 12 months at prices that support or exceed the book value of the assets. The proceeds have been used to repay the corporate debt facility, start the share buyback programme, increase the dividend growth and pay for new acquisitions.
How do the costs stack up?
The latest ongoing charges figure is 1.17%, which reflects the specialist and illiquid nature of the underlying investments. However, given that the implied projected net returns are 9.3% per annum this doesn’t seem unreasonable.
More on International Public Partnerships
| (%) As at 4 Oct |
2019-2020 | 2020-2021 | 2021-2022 | 2022-2023 | 2023-2024 |
|---|---|---|---|---|---|
| International Public Partnerships | 9.2 | 5.5 | 2.4 | -21.1 | 15.2 |
Past performance is not a reliable indicator of future returns.
Source: FE from 4.10.19 to 4.10.24. Basis: Share price with income reinvested in GBP. Excludes initial charge.
Source:
1,2 International Public Partnerships, October 2024
3,4 International Public Partnerships Annual Report 2023
5 Deutsch Numis Investment Companies Research, 5 September 2024
6 Deutsch Numis Investment Companies Research, 19 June 2024
7,8 International Public Partnerships Half-yearly Financial Report, 30 June 2024
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.
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