With so many companies cancelling, cutting or postponing dividends, income-seeking investors are becoming increasingly dependent on the “alternative income” section of the market. Some of these funds, such as the student accommodation ones, have proved economically sensitive, but many are relatively unaffected so their share prices have recovered strongly. GCP Infrastructure Investments stands out as one that hasn’t.
Slow and steady
GCP was one of the earliest alternative income companies to list, launching in 2010. It differentiated itself from the other mainstream infrastructure funds by investing in debt rather than equity. The justification for this was that debt carries lower risk than equity, balanced by lower returns. The other funds were investing in infrastructure projects with highly predictable secure returns rising in line with inflation. This encouraged them to load the projects up with debt to increase the returns of the residual equity, but that equity was vulnerable to a political, regulatory or contractual disaster.
By investing in the debt, albeit the riskier debt rather than the secured bank loans with first call on the cash flow, GCP was better protected. However, disasters didn’t happen and the other funds proved adept at squeezing extra returns – generally about 1% a year – from their portfolios, while sometimes being able to sell out for a large profit. GCP, as exemplified by the tortoise in the corner of its website, plodded along more slowly.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
In the last three years, though, GCP’s total return of 22% is close to its main rivals. Much of that return comes from the most generous dividends in the sector; the net asset value is only 9.8% above the original flotation price of 100p, but with the premium to net asset value down to 3% the shares yield 6.7%.
Since 2010, the company has grown through share issuance to its present market value and asset base close to £1bn. It invested £140m in the year to 30 September, but new investments tailed off sharply thereafter as the manager “does not currently see a material pipeline of secondary market opportunities”. Ian Reeves, the chairman, thinks that “though the need for new infrastructure in the UK remains as significant now as at the time of the initial public offering, governmental support for private sector involvement has significantly reduced and in its current form is unlikely to attract the private-sector investment necessary”. He saw signs that this would change, an optimism that will surely be reinforced by the precariousness of government finances when the Covid-19 lockdown ends.
Attractive given the risks
GCP still invests only in UK debt, but 40% of the portfolio is now described as senior (ie, lower risk) and only 12% of assets are in construction. There are 49 loans in all, with 64% of assets invested in alternative energy, well diversified between wind, solar, biomass and anaerobic digestion assets, while 22% is in private finance initiative (PFI) projects and 14% in supported living (ie, social housing). The average life of loans in the portfolio is 14 years and the average yield 8.1%. With an expense ratio of 1.3%, including the management fee of 0.9% of assets, this would leave GCP short of income to pay the dividend were it not for other income of £11.3m last year – mainly fees from the early payment of loans.
The obvious risk is inflation, but 44% of the portfolio has at least some protection. Investments in debt also imply little scope for increased income, so the dividend hasn’t been raised for several years. But that average loan yield of 8.1% implies a far higher level of risk than is apparent from the quality of the investments, making this an attractive long-term holding for the income section of any portfolio.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
December 2023 NS&I Premium Bond winners - check now to see what you’ve won
If you hold money in NS&I Premium Bonds, you can check from today (2 December) to see if you have won in the December prize draw. Here’s how to check.
By Vaishali Varu Published
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
By Dr Matthew Partridge Published
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
The top funds to invest in - November 2023
Tips Investors are focused on income strategies and FTSE heavyweights. We look at what investors have been adding to their portfolios in the last month
By Vaishali Varu Last updated
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published