Kames Capital: Can infrastructure keep delivering for schemes in 2016?
Pension schemes should review their holdings in infrastructure heading into 2016, with the dual threat of incoming regulation and high prices potentially threatening returns, Kames Capital has said.
Infrastructure has been an increasingly popular asset class for many schemes since bond yields tumbled in the wake of the financial crisis, providing an attractive income in a world where coupons from traditional sources were vanishing.
In the last year the asset class has continued to deliver, with the prices of listed infrastructure trusts climbing as investors snapped up yields between 5-6%.
While the yield has come down sharply from around 8% back in 2006, Colin Dryburgh, investment manager in Kames Capital’s multi-asset team, said the asset class was still proving popular with income hunters.
“We still like infrastructure because things like PFI projects offer investors very stable and predictable returns, and in this environment that remains attractive,” he said.
However, Dryburgh warned 2016 may be more difficult for investors.
“The risks are increasing. Firstly, many names now trade at a premium to NAV following ongoing demand from investors.”
“There is also a potential threat from incoming tax changes being implemented by the Organisation for Economic Cooperation and Development (OECD).”
The so-called Base Erosion and Profit Shifting (BEPS) rules are aimed at tightening up international tax laws and making sure corporates around the globe pay their fair share.
However, these rules have the potential to impact the tax treatment of listed infrastructure assets, potentially hurting share prices.
“These tax proposals are aimed at tax avoidance strategies but some infrastructure trusts with highly leveraged investments could be caught out by the BEPS rules,” Dryburgh said.
If the proposals contained within BEPS are not amended this situation could change, potentially leaving them open to additional liabilities.
“Therefore given that uncertainty, we reduced our exposure earlier in the year to some infrastructure vehicles which had high debt levels, even though the risk from BEPS is reasonably low.”