The selloff and derating of listed infrastructure funds have attracted the attention of new institutional investors with Rathbone multi-asset fund managers David Coombs and Will Mcintosh-Whyte making their first purchases in the sector during the market lows of October.

They told Citywire they added a basket of core infrastructure funds including HICL Infrastructure (HICL ), International Public Partnerships (INPPS ) and debt fund GCP Infrastructure (GCP ), as well as The Renewables Infrastructure Group (TRIG ), attracted by their government-backed, inflation-linked revenues, as well as the liquidity of big funds.

The pair turned their attention to the sector when double-digit discounts first emerged a year earlier following the disastrous 2022 ‘mini Budget’. UK government bond yields shot up in response to the uncosted spending and borrowing plans of short-lived prime minister Liz Truss and her chancellor Kwasi Kwarteng.

Coombs and McIntosh-Whyte felt the underlying operations of most infrastructure funds were complicated for an investor to understand, but core funds, which own the likes of roads, railways and mobile data facilities, were easier to understand, are liquid and offer high yields of 6%-7%.

‘It’s a complicated sector, but if you can get comfortable that underlying operations are strong and feel confident about receiving the dividend, a 20%-30% discount is a nice margin of safety,’ he said, adding that while the yield wasn’t huge versus gilts at over 4%, there was upside if the shares rerate to closer to asset value.

If you are very confident of getting that dividend, then you’re getting a 6%-9% yield from a standing position, he added.

The pair bought the three core infrastructure investment companies in their lower risk £125m Strategic Income and £532m Total Return funds, where they occupy roughly 0.5% weightings amid a range of bonds and equities.

Their sustainable range of funds also established similar positions, as well as buying TRIG, which Coombs and McIntosh-Whyte have recently been adding to as falling power prices precipitated a fall in the shares. The duo see it as a hedge against power prices. 

While a rising dividend wasn’t the primary objective for buying the funds, with HICL already announcing its payout will remain flat until 2025, they are hopeful the boards will do so in line with inflation, preferring that course of capital return to share buybacks.

‘We like to have the liquidity, and buybacks reduce that, so it’s not particularly helpful. You get that short-term win from a reduced discount and part of the reason why we’ve bought these names is that when we’ve spoken to management, they are making very clear-cut allocation decisions generally focused on paying down outstanding expensive debt,’ McIntosh-Whyte said.

He added that he would be happy to see the funds selling off assets at a premium to pay down debt and restore confidence in their NAVs, but only until the portfolio managers felt comfortable about the level of debt and no further. 

While many have argued that misleading investment company costs have kept many investors away from the sector, McIntosh-Whyte did not believe that was the case, noting that a decision to improve disclosure would be beneficial. 

The companies are not the first investment companies in their portfolio, with private equity fund HgCapital Trust (HGT ), TR Property (TRY ) and GCP Asset Backed Income (GABI ), which could be for sale, long-term holdings.

Rathbones is the largest shareholder in a broad range of funds following its merger with Investec, making it an important player in a number of continuation votes by closed-end funds this year.