HICL offers investors an exposure to over 100 institutional quality, lower-risk core infrastructure assets. The primary aim is to provide a robust and steady income stream, with low correlation to changes in GDP or equity markets. HICL’s portfolio has been built up over the past thirteen years, with the manager’s aim being to pay a sustainable dividend, as well as to diversify and extend the income stream as much as possible.
The manager invests in lower-risk, core infrastructure assets with good correlation to inflation over the long term, as well as longevity. Whether investing new capital or reshaping the existing portfolio, the manager seeks to continually improve and optimise the portfolio’s overall characteristics. Over the past year or two, they have been paying particular attention to the portfolio composition. During the last financial year, the manager took advantage of favourable market conditions to make two strategic disposals (realising a total of £148m) and reinvesting £167m in six assets.
The manager has been successfully extending the average portfolio duration over time, and in the last financial year managed to keep the duration level at 29.5 years, despite a year having elapsed. Over that period the manager reviewed a number of investment opportunities with the objective of improving total returns, portfolio yield, cash flow longevity, and inflation correlation. We understand that during the last year InfraRed looked at 65 deals which fit HICL’s investment policy; of these they conducted detailed due diligence on 11 deals on HICL’s behalf, which eventually resulted in five investments being made to deploy the capital resulting from the two strategic disposals.
On a total return basis, HICL has outperformed UK equities since its IPO, delivering a total return of 9.4% p.a. to 31 March 2019, against 6.0% for the FTSE All Share. This strong track record applies even over shorter time frames, with the company having outperformed UK equities over both five years and 12 months. HICL continues to deliver consistent returns with low volatility.
The portfolio’s discount rate, less HICL’s ongoing costs, gives an idea of expected returns going forward. The weighted average discount rate (as at 31 March 2019) was 7.2%, and ongoing costs last estimated as 1.08% pa. Any deviation from this expected return could be a result of either ‘alpha’ delivered by the manager (upside), portfolio risks such as that posed by Carillion (downside), or changes to underlying valuation assumptions (the company is most exposed to changes in the discount rate and inflation assumptions). The depth of resource and breadth of expertise in the HICL management team helped to minimise the impact of Carillion’s failure, and the HICL board has drawn a line under that episode, with a final estimate of the total costs attributable to Carillion coming in at £33m (1.1% of NAV).