Pantheon Infra builds defences against a volatile market

Pantheon Infrastructure (PINT ) manager Richard Sem doesn’t believe in fighting the market but has strengthened his armoury with a pivot into less economically sensitive assets.

The £557m portfolio of global infrastructure assets grew its net asset value (NAV) by 14.3% last year, beating its 8-10% growth target, thanks to hitting its milestone first exit earlier than planned.

However, the shares still trade at an 18% discount to NAV which Sem said has been ‘disappointing’ for shareholders, of which he is one.

‘Everything we have done, we have done well and the performance has been outstanding but the market generally has not been supportive [of investment trusts],’ he said.

‘We cannot fight he market… We need more positive sentiment and we will continue to focus on what we have control of.’

What Sem does have control of is the allocation of his portfolio, which is currently 44% invested in digital assets. Digital assets are made up of data centres, telecoms towers and fibre roll-out, all of which provide the long-term, inflation-linked contracts that help the trust deliver its 4.3% yield.

Sem said data centres typically run on 10-year contracts with ‘hyperscaler’ customers, meaning they need expanding capacity that PINT can deliver. Although there has been concern that expansion by companies using data centres has halted due to the global uncertainty that has upended markets, Sem said in reality expansion is ‘not cancelled but pushed out by one or two quarters’.

Mobile towers, which are 13% of the portfolio, operate on 18-to-20-year contracts with mobile networks, offering diversification of counterparty risk.

Sem said the roll-out of 5G networks is backed by government policy meaning these companies will continue to invest.

‘Mobile towers are less complex in delivery [than data centres] so there are lighter returns but they are still very attractive,’ he said.

More complex is fibre roll-out to home, or fibre to the premises (FTTP), where ‘typical challenges include the cost of capex being higher than forecast’ and greater margin for error, said Sem.

However, his £46m investment in National Broadband Ireland (NBI) has been beneficial to the portfolio. It focuses on building a fibre framework in underserved rural areas and has been the recipient of generous government subsidies.

While digital has been a winner for the trust, Sem is looking to the more recession-proof sectors of power and utilities for new ideas.

The fund has already had a major success in power, with US generator Calpine becoming its first exit, and Sem is particularly interested in how to move power to data centres, tying in two sectors.

In terms of regions, he only hunts in the UK, Western Europe and North America for assets and said as the fund is sterling-based it ‘makes sense to have UK assets and hedge everything back to sterling’.

There is less US exposure in the portfolio currently, although ‘not by design’, and Europe is an interesting region for investment given ‘government initiatives around infrastructure and defence spending’.

While uncertainty abounds, Sem said he is wary of investing in transport infrastructure or sectors that are ‘linked to GDP or the state of the economy’.

‘People would cut off their broadband as a last resort... But when it comes to discretionary spending, taking a short-break holiday in Europe will be one of the first things to go, so things like air travel will come under pressure,’ he said, adding that the is no exposure to this area in the portfolio.

‘A lot has changed in the market. The recession risk is greater now than pre-Trump and we are acutely aware of, and moving away from, GDP-linked investments,’ he said.

Despite the pessimism in global markets, and towards investment trusts more specifically, Sem is confident that he can bag a second exit, and sooner rather than later.

Typically the fund, which was launched in 2021, looks to hold investments for five-to-seven years but Sem said he has already seen ‘some really strong performance for underlying assets and we hope we may receive another early exit’.