Falling inflation could wipe out most of the gains HICL Infrastructure (HICL ) made selling its stake in a US toll road at a 30% premium last week, as data looks set to end the year below management’s assumptions.

The UK retail prices index currently stands at 4% for the year to April, below the 6.5% the manager InfraRed Capital forecast in its September valuation, which could wipe 1.5p off the fund’s net asset value (NAV) per share, offsetting most of the Northwest Parkway sale’s 2p gain.

An interim update this week showed that the $232m (£183m) sale would also reduce the £2.6bn portfolio’s inflation correlation from 0.8% to 0.7%. Analysts noted that this remained a high level of inflation protection, providing visibility of returns, which remains a key attraction of the portfolio.

Deutsche Numis’ Andrew Rees noted that InfraRed increased its inflation assumptions in September, raising RPI forecasts from 2.75% to 3.25% until 2030 and from 2% to 2.5% thereafter. Sector peer and Numis broking client International Public Partnerships (INPP ) was more ‘conservative’, assuming 2.75% to 2030 and 2% from then on.

Higher inflation is positive for infrastructure funds as their contracts, and therefore earnings, are typically linked to the cost of living.

Public and private disconnect

Noting increased market confidence that interest rates have peaked across HICL’s key jurisdictions, the UK, EU, North America, Australia and New Zealand, InfraRed said it was unlikely to change its discount valuation rate in March as it matched what it saw in transactions in the sector, including its own.

Last year HICL lifted its discount rate by 140 basis points (1.4%) to 8% to reflect the risk of rising interest rates on future cashflow. This put it 4% above current long-term UK government bond yields.

‘The investment manager believes the risk premium is appropriate for HICL’s core infrastructure portfolio,’ it said, with assets including hospitals, schools and railways.

While news of the disposal has driven the shares up 5% to 128p since the end of February, they remain at a wide 22% discount to the fund’s NAV.

Ed Hunt, HICL fund manager and InfraRed’s head of core income funds, said this demonstrated the ‘disconnect between public market and private investor valuations for inflation correlated core infrastructure.’

Both HICL’s board and InfraRed remain focused on capital allocation, meaning further likely disposals are likely on top of the £259m of assets sold in the past six months. Last week the company announced it would use the the Northwest Parkway proceeds to pay off its credit facility and launch a 12-month £50m buyback programme.

During the period, HICL invested a further £20m in France’s A63 motorway, which links Bilbao in Spain with Bordeaux. It said a new French levy on companies operating long-distance transport infrastructure was unlikely to impact the valuation.

The 6.8%-yielding investment company maintained its dividend at 8.25p for 2023, in line with the previous four years, which disappointed some investors who hoped for growth in the well-covered distribution.

Net asset value has risen 1.2% over the past year and 24% over three years, while the shares have fallen 15% and 10% respectively, Deutsche Numis data shows.