It has not been the easiest time for infrastructure stocks, whose share prices have nosedived as investors have taken fright at rising interest rates. Their value is determined by what their future cash flows are worth today. Those values are diminished by higher interest rates via what is known as a “discount rate”.
However, Nick Scullion, manager of the Foresight Global Real Infrastructure fund, says the impact of higher rates has been more than reflected in share prices and highlights the “negative sentiment that is washing around the market”. His £533m fund has lost 7pc over the past 12 months, which compares with a 6pc gain by rivals.
Over three years the fund has fared better, with a 20pc return versus 16pc by peers. It yields about 3pc. Mr Scullion explains why recessions do not pose a huge risk to the companies he owns because they typically generate resilient, predictable and often inflation-linked cash flows.
How do you invest?
We buy shares in businesses around the world that own and operate infrastructure assets. We focus specifically on “sustainable infrastructure”, so we appraise each company and its assets to determine whether they are delivering a benefit to society. We also steer away from the infrastructure involved in extracting fossil fuels, which you might find in other funds.
Our goal is to invest in companies with long-term cash flows that last for decades and are paid by governments and other strong “counterparties”. Importantly, about 70pc of the income generated by our assets rises in line with inflation, so we have some protection on that front.
Are you concerned about a recession?
Recession is not a huge concern for us because we favour companies which own assets that generate “availability-based” cash flows rather than those that are “demand-based”. Our companies are paid every day the asset can be used by the public. It doesn’t matter how many cars travel along the road, for example. Demand, which can be affected by recession, isn’t relevant.
Our companies own assets that are critical for daily living, such as energy provision, education, transportation and street lighting. These are not the “consumer discretionary” sectors that are likely to take the biggest hit when the economy goes south.
What impact did the pandemic have on your fund?
The majority of our stocks paid dividends, as we would expect. In fact, our companies were out spending money. While other businesses cut dividends, our companies reaffirmed what they would pay, continued to operate their assets and received payment from governments and public sector organisations.
Why has your performance disappointed over the past year?
Even though infrastructure companies have grown their cash flows this year, they have been affected by higher interest rates. Some of that has been offset by inflation protection within contracts, but there is a great deal of negative sentiment washing around the market.
Share prices now reflect the impact of higher interest rates, possibly going too far in some sectors and companies. We have taken advantage of this to add new companies to the portfolio.
How do you differ from rivals?
With listed companies such as our holdings you can generally trade in and out with ease and you have a degree of transparency of the underlying assets the fund is buying and selling.
We are quite different from competitors because we focus on businesses that already own portfolios of operational infrastructure assets. We avoid companies involved in construction, development and service provision.
We also offer diversification. An investment trust might own a number of big projects. We invest in 30-plus businesses which own thousands, so if one goes wrong there is less of an impact.
What have been your best and worst investments?
Encavis, which owns wind farms across Europe, has returned 121pc over the past three years.
The worst, Scatec, a Norwegian-listed business that owns and operates solar and hydroelectric renewable generation facilities in emerging economies, has lost 9pc over the past three years.
It has been up materially during this period, but by the nature of its assets it can be volatile and the share price has come under stress recently.
We have reduced our investment but continue to hold it.