JUNE 2024
One of the longest track records in Alternative Income: HICL Infrastructure
If you have followed the articles published on our website over the last 18 months, you are likely to have become familiar with the asset class we call Alternative Income. These are Investment Companies that own varieties of Infrastructure with stable demand and, typically, long-term, inflation-linked revenues. HICL is the oldest of these, founded in 2006. It is also one of the largest companies in this sector, and a member of the FTSE 250 index.
HICL invests in core infrastructure: facilities and utilities critical to the functioning of the economy and society. Among its largest investments are Texas Nevada Transmission (TNT), an electricity transmission company, High Speed 1, a railway between St Pancras and the Channel Tunnel, and Southmead Hospital in Bristol. We like this diversity. One struggles to envisage a scenario that affects the operations of all three of these in the same manner.
I mentioned that these contracted revenues are often inflation-linked, meaning that if inflation is 2%, the price that HICL receives also rises by 2%. The majority of HICL’s contracts include this uplift. For every 1% increase in inflation, revenues increase by 0.8%. There will be exceptions, for example a customer of HICL may ask to negotiate an extension to their contract in lieu of paying a higher price. But these idiosyncrasies constitute a large part of the manager’s additional value. The less obvious benefit of this inflation linkage is the compounding over time. A one-off large rise in prices leaves a larger base for future price rises. In fact, HICL produced a handy slide on this, illustrating the additional cash flow they are due to 2050 as a result of the recent spike in prices and increased inflation expectations.
Alongside the diverse, stable, inflation-linked cash flows, one very important benefit of the asset class, and particularly HICL, is their contribution to a more sustainable economy. This fund invests in projects that build and maintain infrastructure used for healthcare, education, transport and myriad more critical services. In some cases, such as renewable energy generation and the provision of water, they also operate the infrastructure, providing the service directly to end users. Unlike a typical equity fund, these investments are made in the primary market. They directly fund the creation of these assets.
This all sounds great, and for the most part it is. However, with any return, there is always a risk and this risk is due to the nature of the underlying assets themselves. Because hospitals or railwaysare large and specialist, they take time and expertise to buy and sell. This makes them inappropriate for daily trading. To solve this problem, and allow daily liquidity, funds are structured as Investment Trusts. These are publicly listed companies existing only to own, and benefit from, these assets. Investors own not the assets themselves but a stake in the company that owns those assets.
In most market conditions, this isn’t a problem, and the price of the Investment Trust fairly reflects the value of the assets it owns (we refer to this as the Net Asset Value, or NAV). In times of market turmoil, such as 2008 and 2022/2023, the share price of Investment Trusts can be adversely affected by negative investor sentiment. At the end of May 2024, the share price of HICL was 22% below the value of the underlying assets. Two years earlier, in March 2022, the share price was 9% above the NAV. The last time HICL, and the few peers who have been around long enough, traded at such wide discounts was during the Global Financial Crisis.
Despite these shifts in sentiment, prices over the long run tend to closely reflect NAV. The share price movements below and above fair value through the cycle allow opportunistic buying and selling, enhancing the already attractive underlying returns. The contractual inflation protection, substantial dividends and diversification benefits of Alternative Income make a compelling case for an allocation in multi-asset portfolios. And, within the sector, HICL boasts the longest and one of the strongest track records. It has been, and is likely to continue to be, one of the most widely held Investment Trusts across our multi-asset portfolios.
This commentary was prepared by the CAM Research Team.