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Questor: last week we had the great opportunity, now the great risk – sell infrastructure trusts
Questor investment trust bargain: high premiums make these trusts ‘priced for perfection’ and they are exposed to political risk around the world
When last week we asked a prominent fund manager to identify the best opportunity in the market – he plumped for “micro-cap” investment trusts – we also asked the opposite question: where did he see the worst prospects. His answer? Infrastructure trusts.
Just as the fund manager, Nick Greenwood of Miton, said a “perfect storm” had sent micro-cap trusts’ shares to attractively low levels, a combination of factors had pushed infrastructure trusts to the other extreme.
“The first is that these trusts are ‘yield starvation vehicles’ – they appeal to investors desperate for income at a time of very low interest rates. This has pushed their shares out to high premiums to net asset value,” he said.
“Secondly, they are in our view increasingly exposed to political risk.” Mr Greenwood said the rise of populism around the world amounted to “a breakdown of the political certainties that have characterised the post-war period” and, because infrastructure trusts hold assets in sensitive areas such as water supply, they were particularly exposed, not just to a potential Labour government in Britain but to similar movements globally.
Finally, there is a technical point: if investors did want to quit these trusts en masse, the “buffer” of trading capacity offered by brokers is tiny by comparison with the billions of pounds invested. This would be felt in dramatic price falls in the event of a sell-off; current double‑digit premiums could quickly become double-digit discounts, Mr Greenwood said.
Three infrastructure trusts tipped here in the past, John Laing Environmental Assets, Greencoat UK Wind and GCP Infrastructure, are trading at double-digit premiums and will now be sold; Ecofin Global Utilities & Infrastructure is already at a 11.5pc discount and remains a hold.
Questor says: sell, sell, sell, hold
Tickers: JLEN, UKW, GCP, EGL
Share prices at close: 117.5p, 138.8p, 125.8p, 146.25p
Update: Woodford Patient Capital Trust
Is this trust, in the news so much this year for all the wrong reasons, about to get a new name? There is a strong possibility in Questor’s view that Neil Woodford will be sacked as the trust’s manager following this week’s announcement by the board that it is talking to other fund houses about taking over the running of the portfolio.
Its statement said: “While the board remains confident in the current day‑to‑day management of the portfolio, [it] intends to engage with a broader range of third-party managers in order to undertake a full assessment of all potential management options, which may or may not lead to a change in the company’s management arrangements.”
We don’t know the identity of these other groups but we can be certain that if one of them wins the management contract it will ditch the Woodford name.
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A new manager would also mean new costs for shareholders: currently Mr Woodford doesn’t charge for running the portfolio (there is provision for a performance fee, which, naturally enough in view of the shares’ 52pc fall since flotation, has not been triggered). A new manager is unlikely to be willing to work for nothing.
The trust also announced that Mr Woodford had, between July 3 and 8, sold £1m worth of his own shares in the trust as “a reluctant seller” and “in order to meet personal financial obligations, including a tax liability”.
While he was under no obligation to disclose the sale earlier, Questor sees the delay as regrettable in view of the very wide interest in all the trust’s affairs at present. The sale more than halved his stake; his remaining shares are worth about £593,000.
Now that the board has said publicly that the trust’s management is up for grabs, the pressure on it to go through with a change will, in this column’s view, be overwhelming.
Meanwhile we see the depressed share price as a reflection of extreme negative sentiment rather than an objective valuation of the portfolio. We will hold on.
Questor says: hold
Ticker: WPCT
Share prices at close: 47.35p
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