One of the lessons to have emerged from the travails of Neil Woodford’s investment firm is that there are good and bad ways to put together an investment vehicle that takes stakes in unlisted illiquid assets. 3i Infrastructure is a perfect example of one of the good ways.
Founded in 2007 by the FTSE 100 private equity investor 3i, it is an investment trust whose brief is to generate capital growth and income for investors over the long term by investing in infrastructure assets, which can range from waste treatment and processing facilities to renewable power developers.
The trust is a constituent of the FTSE 250 and 3i both manages the investments and has a 33.35 per cent stake that it is showing no signs whatsoever of wanting to offload.
The reason it is the right way to invest in hard-to-trade holdings is that 3i will not become a forced seller of any of its assets if investors turn bearish and sell. This is the underlying problem at Mr Woodford’s equity income fund.
Based on its prevailing performance, particularly over the past two years, shareholders in this 3i investment trust have had little reason to head for the exit; the opposite in fact. As an example, over the year to the end of March, 3i Infrastructure improved the net value of its assets by 15.4 per cent, way ahead of its target of between 8 per cent and 10 per cent. It generated a total shareholder return of 33 per cent, against a 1 per cent increase in the wider FTSE 250.
The shares have gained 43.6 per cent over the past 24 months and trade at a premium to its net asset value of a very high 19.5 per cent.
Several years ago 3i rethought its investment strategy, moving away from stable cashflow generators such as utilities to businesses that, while still cash generative, can be developed operationally, including expanding through acquisitions.
While it still buys and sells assets — offloading its stake in the Thameslink rail rolling stock leasing company Cross London Trains for £333 million in February — it has effectively now created its core portfolio of what it sees as long-term growth businesses.
It looks good from here. Take the two biggest holdings. Infinis is the UK market leader in generating electricity from landfill gas and coalmine methane. At the forefront of green energy, it plays into the government’s drive for renewables projects and has expansion through M&A built into its strategy.
The Wireless Infrastructure Group builds and operates the towers and other equipment that connect networks and communities. It is at the centre of the introduction of 5G connections and, as well as expanding by acquisition, is involved in other projects such as developing networks for driverless car trials.
Also among the core nine holdings are ESVAGT, a business based in Denmark that provides emergency response vessels and services for wind farms, and Attero, a company based in the Netherlands that operates waste treatment and processing facilities.
This investment trust positively oozes quality. The problem for prospective investors is that this is no secret and the premium rating for the shares, which have risen by nearly 44 per cent in the past two years, is undoubtedly offputting.
The asset sales that have helped to deliver its outperformance over the past two years are likely to feature less in the coming years, but there is every reason to expect the core portfolio to deliver solid returns.
As well as appreciating, the shares, off 1½p, or 0.5 per cent, at 280½p yesterday, carry a respectable yield of nearly 3.2 per cent. If you own them, don’t let them go easily.
ADVICE Hold long term
WHY High-quality, diverse portfolio of investments that should deliver consistent growth and value
Just Group
What to do about Just Group and its share price? To recap, this column recommended buying shares in the retirement market specialist in March 2018 when they stood at 130p. They then fell. It told investors who’d followed the call to “hold” in September after a 32 per cent drop in the price to 88p. They fell again.
In fact, the shares have since halved, falling a further 4½p, or 9 per cent, yesterday to 44½p.
Just Group was formed through a merger in early 2017 and specialises in retirement products. The most important are lifetime mortgages — loans, mainly taken out by retired people wanting to liberate value from their homes — and bulk annuity pensions, in essence insuring risks associated with defined benefit retirement schemes.
Its problems stem from a decision by the Prudential Regulation Authority, which oversees the financial sector, to make companies such as Just Group that sold lifetime mortgages between 2005 and 2015 hold additional capital.
This is effectively to cover the risk that a sharp fall in house prices — after a hard Brexit, say — would leave them facing heavy losses when the loans fell due and the properties were sold. Historically, the number of the group’s problem mortgages has been infinitesimally small.
Just Group has responded by tightening its lending criteria for lifetime mortgages and raising £375 million through a combination of debt and a shares placing. The funds cover not only its additional capital requirements but also the cost of writing new business until 2022, when the company should be self-funding (the interest payments on mortgage loans more than cover payments to pensioners).
The company is profitable and sustainable, but the market is really worried, more recently mainly about a hard Brexit. It also wants clarity about who will be its finance director and chief executive, roles currently both covered by the interim boss, David Richardson, 46. Keep your nerve with this company, which is a takeover target. Both the regulator and Brexit are unpredictable but unless Armageddon strikes the shares should start to turn.
ADVICE Hold
WHY Aside from a calamitous fall in house prices, it is otherwise resilient
