Our ‘lend­ing money to bridges’ fund is do­ing just what we hoped of it. Hold

The Se­quoia Eco­nomic In­fra­struc­ture In­come port­fo­lio doesn’t ex­pect Covid-19 to blow its div­i­dend off course

The Daily Telegraph - Business - - Business - RICHARD EVANS Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­graph.co.uk/go/ questor­rules; twit­ter.com/DTquestor

SEV­ERAL of the re­cent ad­di­tions to our In­come Port­fo­lio have is­sued up­dates in re­cent weeks. All were bought with the in­ten­tion to make our in­come more se­cure.

Is our strat­egy work­ing? We’ll cover some of these up­dates in the com­ing weeks and will start with the Se­quoia Eco­nomic In­fra­struc­ture In­come fund.

This trust, known as Seqi, is un­usual in that it makes money from in­ter­est on loans ad­vanced to the own­ers of in­fra­struc­ture as­sets such as bridges. As these as­sets them­selves tend to gen­er­ate sta­ble in­comes, the trust’s div­i­dends will, we hope, prove far more re­li­able than those in other parts of the mar­ket, where coro­n­avirus has taken such a toll.

The signs are good. In May last year the trust in­creased its an­nual div­i­dend tar­get

from 6p to 6.25p a share and in the an­nual report for the year to March the board said it ex­pected, in the “ab­sence of any sig­nif­i­cant re­strict­ing fac­tors”, to pay that amount “for the fore­see­able fu­ture”.

It said it had car­ried out a “com­pre­hen­sive port­fo­lio and bal­ance sheet re­view” in light of “ex­cep­tional mar­ket volatil­ity aris­ing from the Covid-19 pan­demic and oil price col­lapse”. Its assess­ment of cash yields al­lowed the “reaf­fir­ma­tion of div­i­dend cover and tar­get for the fi­nan­cial year end­ing March 31 2021”. The ac­tual divi paid for the past fi­nan­cial year was 6.1875p, which re­flects the fact that the tar­get was raised part way through that year.

We are, as al­ways, less con­cerned about the value of a trust’s as­sets, which can be ex­pected to wax and wane in a way that we hope div­i­dends will not. The port­fo­lio’s net as­set value per share fell from 103.41p to 96.69p over the fi­nan­cial year as a re­sult of the down­turn in the fi­nan­cial mar­kets gen­er­ally, in­clud­ing those mar­kets used by the trust’s in­de­pen­dent val­u­a­tion agents as pric­ing bench­marks for its as­sets. Once div­i­dends were taken into ac­count, the trust’s to­tal re­turn on the ba­sis of net as­set value over the year was mi­nus 0.9pc. Al­though the trust does not ex­pect the pan­demic to af­fect its abil­ity to pay the div­i­dend, it has mod­i­fied its in­vest­ment strat­egy in re­sponse to the cri­sis.

In a move that this col­umn finds re­as­sur­ing, the board said there had been a “re­di­rect­ion of the in­vest­ment ad­viser’s re­sources from orig­i­na­tion to en­hanced credit and port­fo­lio mon­i­tor­ing” – in other words, for now it is pay­ing less at­ten­tion to in­vest­ing in new loans and more to mak­ing sure that its ex­ist­ing ones do not get into trou­ble.

The man­agers are keep­ing at least one eye on pos­si­ble new hold­ings for the port­fo­lio, how­ever. While the trust said it had im­posed re­stric­tions “on cer­tain new in­vest­ments”, this was done with a view to “preser­va­tion of bal­ance sheet ca­pac­ity to take ad­van­tage of dif­fi­cult mar­ket con­di­tions and op­por­tu­ni­ties to in­vest in new loans on at­trac­tive terms”.

It ex­plained that “in the cur­rent en­vi­ron­ment there is the pos­si­bil­ity that a num­ber of high-qual­ity eco­nomic in­fra­struc­ture in­vest­ments will ap­pear on the se­condary mar­ket at at­trac­tive prices”. The se­condary mar­ket is where lenders that orig­i­nated loans sell them on to other in­vestors. “As the com­pany slowly ramps up de­ploy­ment of its cash as the mar­ket im­proves, these op­por­tu­ni­ties could be a sig­nif­i­cant source of [out­per­for­mance] with­out sac­ri­fic­ing credit qual­ity,” it added.

Even if we as­sume that the global econ­omy can re­cover well from the pan­demic there is con­cern that vastly in­creased govern­ment spend­ing across the world will stoke in­fla­tion. We can take com­fort from the fact that 70pc of Seqi’s port­fo­lio con­sists of “float­ing-rate in­vest­ments”, which means that it will re­ceive higher rates of in­ter­est on its loans if in­ter­est rates gen­er­ally rise.

An­other pos­i­tive devel­op­ment is that the on­go­ing charges ra­tio for the year to March was 0.96pc, com­pared with 1.02pc the pre­vi­ous year. We see this as rea­son­able in view of the de­tailed re­search needed be­fore money is in­vested in as­sets of this type.

This trust is do­ing what we hoped of it and we will hold.

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