HICL Infrastructure: June 2023 update

• InfraRed Capital Partners has over three decades of experience in the industry
• The trust aims to provide a sustainable income for investors over the long term and has reconfirmed a dividend of 8.25p per share for 2024 and 2025
• Compared to 2022, the trust’s net asset value (NAV) has increased by 1.1%, though its discount to NAV has widened slightly

How it fits in a portfolio

The HICL Infrastructure Company trust aims to provide investors with a stable, sustainable income over the long term, along with some capital growth. 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.

The trust could diversify an income-focused portfolio, as well as providing some protection against inflation. Investors in investment trusts should be aware the trust can trade at a discount or a premium to its net asset value (NAV).

Manager

InfraRed Capital Partners, or InfraRed, is the investment manager for HICL Infrastructure Company. They are responsible for the day-to-day management of the trust and have been investing in infrastructure and property since 1990. Edward Hunt, Head of Core Income Funds, leads the InfraRed team and is supported by a team of over 100 infrastructure professionals, 20-25 of which are dedicated to this trust.

As with any investment trust, there’s also a board that oversees the company management for its shareholders. Hunt is the bridge between the investment team and board, so engagement remains open and collaborative. With eight members it has a broad range of financial and investment experience which should ensure it’s able to hold the trust managers to account.

Process

The trust invests heavily in the UK, making up 64% of its assets, with the rest invested across Europe, North America and New Zealand. In keeping with HICL’s vision, the managers invest in core infrastructure, which is a part of the market featuring assets that are essential to economies and societies. This includes anything from network assets like water and electricity, to transport assets, including rail networks and motorways.

The managers believe that investing in assets playing such a significant role in the well-being of communities can drive sustainable income for investors over time. But it also helps to provide steadier more reliable returns from their investments. Though there are no guarantees.

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. PPP Projects make up a large part of the trust and are generally considered lower risk investments. This is because they are backed by the government, though when it comes to investment there’s always risk involved.

There have been a few changes in the PPP Projects segment of the trust, most notably through the acquisition of Cross London Trains, otherwise known as XLT. XLT owns a fleet of around 115 electrified trains which operate on the Thameslink passenger rail route in London. The managers think the company has a strong operational track record and could benefit from the ongoing renewable energy transition. The project benefits from a 20-year contract, which commenced in 2016, and is fully backed by the UK Department for Transport.

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. The managers decided to reduce their investment in Northwest Parkway to help fund other investments, but also because of recovery concerns. Northwest Parkway is a four-lane toll road that forms part of the ring road around Denver and the uptick in traffic and bounce back from the pandemic is taking longer than expected.

Regulatory assets can represent around 10-15% of the portfolio and are infrastructure assets that are deemed essential, such as water or gas utilities. Affinity Water used to be the main asset in this part of the trust, but the managers recently invested in a US regulated asset – Texas Nevada Transmission – given its market share and role in the energy transition. These types of assets 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.

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. HICL delegate the day-to-day management of the trust to InfraRed Capital Partners. InfraRed can trace its roots back to 1990, when it was established as a part of Charterhouse Bank with a focus on real estate. From offices in London, New York, Sydney and Seoul, InfraRed actively manages over 220 infrastructure projects across 17 countries, with over $14bn under management in private and listed funds.

ESG integration

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.

HICL actively contributes to the United Nations Sustainable Development Goals through the delivery of reliable and resilient infrastructure that supports economic development and human wellbeing. They publish an annual sustainability report which can be found on their website.

Cost

The ongoing annual charge over the trust’s financial year to 31 March 2023 was 1.09%, marginally higher than the 1.06% figure for 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 fee of 0.45% (capped at £200 p.a. for a SIPP and £45 for an ISA) per annum also applies. Our platform fee doesn't apply if held in a Fund and Share Account. As investment trusts trade like shares, both a buy and sell instruction will be subject to our share dealing charges within any HL account.

Performance

Since the trust launched in March 2006, it's delivered good returns to investors, though at times there have been periods of volatility.

For example, the trust held up well during the pandemic and delivered strong returns, owing primarily to the defensive nature of the infrastructure assets it invests in. Over the trust’s most recent financial year (to the end of March 2023), performance hasn’t been as strong.

While the trust’s NAV grew around 1.1% over this period, driven by the portfolio’s strong correlation to inflation, it’s a small decrease compared to the end of last year. The trust’s share price fell 8.54% which is behind the average returns from peers in the AIC Infrastructure sector. Past performance is not a guide to the future.

Utilities companies Affinity Water, which is the trust’s largest regulated asset, was a key detractor over this period. A large driver behind this was the impact from adverse weather conditions over the year. Ultimately, it led to an increase in operating costs and hampered its ability to fulfil some of its commitments, which meant the business incurred a penalty charge.

Most of the trust’s key demand-based assets performed in line with expectations, except for Northwest Parkway. One of the reasons the managers decided to reduce their investment was down to a slower than expected recovery. While traffic has rebounded, usage is still well below pre-COVID levels.

It’s not been all bad news though. The other demand-based assets – the A63 Motorway and rail network High Speed 1 (HS1), have seen an increase in traffic and steadier recovery. The A63 Motorway has been able to increase toll charges, whereas HS1 has beaten previous forecasts for Eurostar bookings.

The managers were able to declare the full year dividend at 8.25p per share, with a target set to keep it the same for both 2024 and 2025. While this is lower than some peers, the managers wanted to keep it sustainable for investors as well as improve the underlying cash flows of the portfolio, which will help improve the trust’s dividend cover. At the time of writing, the trust yields 6.18%, although yields are variable and not a reliable indicator of future returns.

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2023.

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HICL Infrastructure Company Limited KEY INVESTOR INFORMATION

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