At Gould Financial Planning we believe that diversification of assets is key in minimising volatility and reducing overall risk. This belief applies equally to the property asset class and in recent years we have introduced infrastructure investments into our client’s portfolios as an alternative property play.
Our investment of choice has been the HSBC infrastructure Company, an investment trust domiciled in Guernsey, backed by physical assets such as schools, hospitals and government buildings amongst others. Many of these assets enjoy income streams which are government- backed and inflation proofed and, as such, we believe that this strategy has real longevity and security.
Many investors and advisers share our view! This has resulted in the trust gaining popularity and the share price inflating to a premium above the Net Asset Value of between 15 and 20%.
This, unsurprisingly, has led to us questioning whether the current share price offers investors a fair deal. The higher the premium the lower the effective income yield; the average annual dividend is over 7% per share but the yield has reduced to just above 5% owing to the large premium. Whilst the trust has historically traded at a premium a line does need to be drawn somewhere!
Our view is that the popularity of the trust will continue so long as interest rates remain so low. Net savers who previously looked towards cash deposits to provide their income have been forced to look for other homes for their savings in order to generate an ample level of income. With this investment strategy seemingly offering a relatively secure source of income it comes as little surprise that many have parked their savings here. We feel demand might cool down when interest rates begin to rise again resulting in a fall in capital value; however, if the high level of income remains, this will offset much of any loss in share value.
Our stance now is that we are not committing any new monies to the trust due to the high premium. The current premium at between 15 and 20% represents almost three years’ worth of income; we therefore feel that this cost at outset is high, and one which has reached too high a point to continue justifying bearing in mind that interest rates are more likely to rise than fall. Decisions on existing holdings are largely driven by investment timeframe; we feel that shorter investment timeframes are at a higher risk. However, we are comfortable with existing holdings being retained in most other circumstances; the income stream is strong and this will not change, and with government spending on infrastructure in the UK in particular looking strong, we do wish for an exposure to infrastructure to be retained.
There will come a time where we look to protect existing investors from what we believe could be a fall in capital value from this trust, but with any short term rise in interest rates likely to be small in the first instance, we do not believe this time is upon us just yet. We have identified a UK-regulated fund by First State which invests into infrastructure companies as opposed to physical infrastructure projects, and whilst we anticipate volatility could be greater here due to the lack of physically- backed assets this is an alternative way of accessing the infrastructure sector which we believe could generate strong returns for investors over the long term.
We plan on dealing with existing holdings in this trust at regular reviews and on an individual basis; however, if you would like to discuss your holding earlier than this please do not hesitate to contact me.
01633 653 187