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An infrastructure fund favoured by UK income investors is trading at a discount for the first time after management warned about the potential impact of a Labour government attack on private finance initiatives (PFI).
In a trading update released on November 13, the John Laing Infrastructure Fund — which derives the bulk of its income from UK PFI projects — spooked investors by saying it would only receive 86 per cent of the value of its UK portfolio in compensation if Labour were to bring PFI contracts in-house.
The investment trust said in the event that all of its UK projects were voluntarily terminated by “each and every local public sector counterparty”, JLIF would receive compensation equivalent to 86 per cent of the value of its UK portfolio.
JLIF added that its 57 UK projects were spread among seven sectors and 50 different public sector counterparties, limiting the risk.
Investors reacted by selling down the trust’s shares, which shed 3.4 per cent of their value on the day of the update, reaching a discount to net asset value of 1 per cent. This is the first time the investment trust’s shares have traded at a discount since it listed on the stock market in 2010.
JLIF’s share price has fallen 13 per cent from a three-month high of 139p on September 19 according to broker Stifel, despite an increase in the value of JLIF’s portfolio in the nine months to September 2017.
Stifel said the discount presented a buying opportunity. The broker said: “Whilst there are multiple factors which merit some derating, we believe the sell-off is overdone.”
The trust — alongside other specialist infrastructure funds — has been experiencing a sell-off since the Labour party conference at the end of September, when shadow chancellor John McDonnell branded PFI a “waste of taxpayer money” and pledged to scrap it under a Labour government.
PFI concerns were not the only issues raised in the statement. JLIF also wrote down a hospital investment worth less than 0.5 per cent of its portfolio due to a longstanding dispute, and highlighted potential issues facing two assets in Barcelona that had been brought under the control of the Spanish central government following the Catalan independence vote.
JLIF UK PFI investments include hospitals, government buildings and secondary schools, whose income is dependent on long-term agreements with the government. PFI schemes launched under the former Labour government have attracted controversy in recent years, with critics accusing them of being costly and inefficient.
The long-term contracts in JLIF’s portfolio, which range between 10 and 30 years, are the backbone of its appeal to income investors. The trust yields 5.9 per cent and has consistently traded on a double-digit premium since IPO in November 2010 due to its high and consistent income stream.
“This does all seem very hypothetical as Labour are not in power, but when you have very long-dated revenue streams, sentiment can make a big difference,” said Charles Cade, head of companies research at Numis.
“The majority of trusts in this sector [invested in infrastructure assets] have come off since the Labour party conference,” he said. “But JLIF has greater exposure than rivals to PFI contracts. Other trusts have been diversifying into other areas recently.”
Trusts that have fallen in value in recent months include HICL Infrastructure , which invests in assets including water utilities and student accommodation as well as public private partnerships. It has fallen from its peak of a 23.56 per cent premium to NAV in August 2017 to a premium of 4.7 per cent.
Numis analysts said the market could either “take comfort from the . . . robust protections limiting downside risk” given the unlikely nature that all public sector counterparties would terminate PFI contracts early, or experience further share price weakness as investors “incorporate the worst-case scenario valuation”.