In her exclusive column for Professional Paraplanner, Juliet Schooling Latter, research director, FundCalibre, looks at funds approaching or having just past their three-year anniversary. This time it is the VT Gravis UK Infrastructure Income.
It’s been more than a decade since infrastructure funds began to appear on the radar of retail investors.
Their main attraction has always been the prospect of a strong and stable income – essential in an era when interest rates have been at or near record lows following the credit crunch.
If investors still need convincing of their plaudits as an asset class, they only have to look at the past couple of months, as the impact of coronavirus continues to indiscriminately hit all industries across the UK – with income investors bracing themselves for significant falls in dividend returns from a reeling economy.
VT Gravis UK Infrastructure Income is one such fund and, in today’s environment, it truly stands apart as an alternative income option for investors. It also has the benefit of having been designed to be resilient in periods of economic stress.
The portfolio has a heavy bias towards operational assets (which account for around 85% of portfolio’s value). This bias alleviates pressures associated with the delay, or increased costs associated with development or construction stage assets during this period of restricted movement. The portfolio is also averse to taking on significant levels of exposure to assets that generate cash flows on a short-term demand or volume/usage basis. Instead, it has a bias towards assets that derive their revenues directly from the government or within a regulated framework with high barriers to entry.
Valu-Trac (VT) is the investment manager of this fund, while Will Argent, who is employed by Gravis, is the fund advisor. He joined the firm in 2017, having spent 12 years working as an analyst within the private wealth management sector and, at the end of July, will celebrate three years at the helm.
Will says: “The infrastructure sector gives you long visibility given the contracted cashflow and the critical nature of the underlying assets, putting them in a resilient position in these unique times. Whether its waste water, maintaining schools, utilities or power – all of these social services are being used or maintained during this time of significantly reduced economic activity. That’s why you can have confidence in the cashflow being largely uncorrelated to broader economic conditions.”
That resilience has been highlighted by the fund falling only 12.9% in the first quarter of 2020 – compared to 23.9% for the MSCI UK Index*.
In practice, the vast majority of the fund is invested in investment companies (66.1%*) and Real Estate Investment Trusts (17.8%*). These vehicles allow Will to achieve good diversification, whilst getting access to specialist management in a particular niche – such as renewable energy, student accommodation or GP surgeries. The fund has an income target of 5% per annum, which is distributed quarterly.
Will looks for companies based on a number of key factors: yield sustainability, inflation-hedging characteristics, sustainable valuation and low relative volatility. Holdings must also have a certain level of liquidity. The fund is generally low turnover, with a heavy emphasis in making long-term investments in infrastructure. However, Will can reduce or trade out of a position if a holding looks overvalued, or if its dividends are under pressure. The most active trading comes in the small equity component of the fund.
A minimum of 75% of the portfolio must be supported by UK government or regulated cash flows. A minimum of 80% of the fund must be invested in completed or operational assets, while up to 20% of the portfolio can be invested in ‘demand’ based projects. All investments are in sterling-denominated securities.
Although a reasonably concentrated fund, with less than 30 holdings, the vehicle is exposed to around 1,000 separate underlying projects and is therefore extremely well diversified.
Investors should be aware the fund can, and does, invest in investment trusts managed by Gravis, with the GCP Infrastructure Investments and GCP Asset Backed Income fund among its top 10 holdings*.
The fund has returned 30.4%** since its launch in January 2016 and 13.5% over Will’s tenure***. It has an ongoing charges figure of 0.75%*.
*Source: Provider factsheet at 31 March 2020
**Source: Source: FE Analytics, total returns in sterling, 25 January 2016 to 29 April 2020
***Source: FE Analytics, total returns in sterling, 31 July 2017 to 29 April 2020
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.