Anyone watching financial markets in recent years will have noted the rising popularity of infrastructure investment trusts followed by an extended period of malaise. Stubborn discounts have dogged the sector for a multitude of reasons.
Increased bond yields caused investors to pull back due to worry about net asset value (NAV) certainty, whilst consolidation amongst the wealth management industry resulted in a reduced ability among these professional fund pickers to hold smaller trusts.
Compounding this, mis-applied regulatory rules on cost disclosure have still not been properly resolved as the Financial Conduct Authority’s (FCA’s) Consumer Composite Investments (CCI) regime consultation is still underway. The recent situation is a reflection of a supply/demand imbalance among infrastructure vehicles.
Historically, there has been too much stock issuance from incumbents and a proliferation of ‘me-too’ trusts launched in the final stages of the low-interest rate era.
For example, a question mark now hovers over whether the market needs three different (but broadly very similar) solar energy infrastructure trusts all trading on wide discounts.
That is before we consider the fact that other trusts also include solar energy as a portion of their portfolios.
Until this supply/demand imbalance is corrected, discounts across the sector will likely remain a stubborn and ever-present ghost excepting individual trusts that receive bid approaches, wind down completely, or put themselves forward for a transaction as recently seen with BBGI Global Infrastructure.
Positive developments are beginning to emerge. The sector has begun to do some of the work required by the market to address the situation with share buybacks now almost standard across the infrastructure trust sector.
However, boards need to go much further and consider whether the current number of individual vehicles is really needed.
It was a matter of concern to me before the sector turned, how the investor base was going to keep track of and understand the proliferation of different names all offering something broadly similar.
Lack of investor knowledge around basic fundamentals can lead to blind buying in ‘easy times’ but when the asset class faces headwinds that same lack of knowledge and understanding can lead to blind selling, regardless of valuation. In this scenario, undeserved premiums become irrationally wide discounts.
These irrational discounts have now attracted closer attention from activists. Existing traditional long-only fund selectors and asset allocators have long been engaging closely with boards to instruct on the conditions needed to secure a ‘buy’.
However, the recent launch of Achilles Investment Company, an IPO supported by us and other well-known investors in the sector, is one that boards across the investment company market as a whole should sit up and take note of.
Those board members who are perceived to be acting passively, or worse self-interestedly, will not be judged kindly by the market.
Achilles has launched with the explicit intention of taking more direct action on a small cohort of infrastructure and property-oriented trusts, identifying underperformance or undervalued assets with the intention to unlock value via direct active engagement with boards and investment managers.
No option is off the table, including the sale of an entire company or individual assets, changes to investment strategy or restructuring.
We have already seen its impact on one such trust Achilles took a position in: Urban Logistics REIT, which is now a bid target for LondonMetric following activism by Achilles and other shareholders.
Activism, in contrast to recent sensationalist headlines, can be extremely constructive when done right. But ultimately, identifying new sources of demand for infrastructure trusts is paramount.
Such demand should be attracted by the compelling value on offer, something that contributed to our own decision to include infrastructure in our recently launched Momentum Real Assets Growth & Income fund.
The potential to capitalise on the current discount landscape is very attractive, particularly when the FCA’s CCI consultation could bring regulatory clarity and trigger a revaluation of these assets in the near future.
As the infrastructure sector emerges from the doldrums and sentiment improves, we anticipate a significant re-rating, potentially delivering substantial returns for investors who can successfully navigate the current market inefficiencies.
Richard Parfect is a portfolio manager at Momentum Global Investment Management. The views expressed above should not be taken as investment advice.