David Brenchley, The Times, Saturday November 11 2023:
Infrastructure is all around us. From hospitals, schools and roads to the wind and solar farms that are used to power our lives.
This omnipresence and the long-term need to build more of these assets have made infrastructure investment trusts popular. These trusts pool investors’ cash to buy into a diversified portfolio of assets including railways, bridges, wind turbines and energy-storage facilities.
For a long time investing in infrastructure was seen as a way of getting a steady, growing income, like you get from a government bond, at a time when interest rates were rock bottom. Infrastructure trusts own assets that are leased out, so most of their returns come from rent.
For most of the ten years to September 2022 infrastructure trusts were said to be trading on a premium — watch out, here comes the science part..
A lot has changed in a couple of years. Interest rates have gone from 0.1 per cent to 5.25 per cent. This has hit the share prices of infrastructure trusts hard because you can now get a good return from safe government bonds.
Higher interest rates also cut the value of infrastructure assets. This is because the future cashflow of each asset is measured against what is known as a discount rate, which is often linked to the yield on government bonds. When interest rates go up so does the discount rate, reducing valuations. Also, because infrastructure trusts borrow money to fund projects, higher rates make refinancing those debts more expensive.
The upshot is that the average infrastructure trust is down 35.6 per cent over the past two years, and the average renewable energy infrastructure trust has lost 18 per cent, according to the data firm FE fundinfo. That looks like a chance to snap up shares on the cheap…
James Carthew from the research firm QuotedData suggested Aquila European Renewables, which invests in solar, wind and hydropower.
I’m looking to drip-feed some cash into infrastructure and renewable energy trusts, and will start with Greencoat UK Wind, which owns wind farms. It has had the highest NAV total return in the sector over the past five years, at 13.8 per cent a year.
The Aquila fund’s diversity looks attractive too.
Read more here