Why is your fund a ‘fund to watch' and how could it work in an investor's portfolio?
The Fund provides relatively high levels of income for investors, underpinned by the contracted nature of the cash flows generated by underlying portfolio companies. Infrastructure companies typically provide essential services in relation to healthcare facilities, energy and water provision, communications, or transport and logistics, for example. As such, they may be considered defensive in nature and less sensitive to cyclical economic trends. These characteristics would likely prove attractive to investors looking for regular income and portfolio diversification benefits.
Moreover, UK infrastructure is at a critical juncture and requires unprecedented levels of investment to replace ageing buildings in healthcare and education provision, to modernise energy transmission and distribution networks, advance digital services, and meet decarbonisation goals. The government is supportive of private investment in such projects and that should provide opportunities for companies operating in the sector.
Can you give an overview of the team running the fund and your investment process?
William Argent is the fund manager. He has been responsible for the oversight of the VT Gravis UK Infrastructure Income Fund since 2017 and has significant experience investing in global capital markets. He maintains a specialist focus on the listed infrastructure and real asset sectors. William is supported by myself, fellow senior research analyst James Peel, and Matthew Norris, Gravis's Head of Real Estate Securities.
The VT Gravis UK Infrastructure Income Fund invests in the UK listed infrastructure sector and is designed to provide an attractive level of regular income with the potential for capital appreciation over time. The Fund invests in GBP-denominated securities, including Closed-Ended Investment Companies, Real Estate Investment Trusts, equities, and corporate bonds.
The Fund will typically maintain diversified exposure across a range of infrastructure sub-sectors but is not constrained by or managed in relation to a benchmark index. Alongside the focus on income generation, the portfolio is constructed with a view to maintaining an overarching bias towards operational infrastructure assets (as opposed to development or construction stage exposure), infrastructure projects that are supported through government-backed revenues or regulatory frameworks, and limited exposure to projects that are sensitive to cyclical demand factors.
What do you see as the big opportunities and risks for your strategy?
Many companies that form part of the UK listed infrastructure sector presently trade on sizeable discounts to their net asset values. A re-rating of these companies such that share prices are more closely aligned with net asset values would drive attractive returns for investors. In the interim, the sector is highly income generative and distributes high levels of income via dividends, so investors are paid well to wait for capital upside.
We have also started to see increased M&A activity across the broader UK listed infrastructure sector more recently, with several companies receiving takeover approaches at premiums to prevailing share prices. This development potentially confirms that companies within the sector are currently undervalued by the broader market.
Risks include potential macroeconomic developments that would provide headwinds for income-focused strategies. This would include a return to a rising interest rate environment and higher government bond yields. These factors could reduce the relative attractiveness of infrastructure sector yields as well as place upwards pressure on the discount rates that companies apply to expected future cash flows in order to calculate net asset value.
Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Within the broader UK infrastructure sector, the Fund has a significant exposure to companies that are involved in the country's transition towards a low carbon economy. This is represented through companies that own and operate renewable energy generation assets but also through companies that develop and own related infrastructure assets including electricity transmission networks and energy storage solutions that will require investment in order to harness intermittent renewable power generation and achieve net zero ambitions.
Shayan Ratnasingam is a Senior Research Analyst at Gravis Advisory Ltd
