Sequoia Economic Infrastructure Income (SEQI ) has repositioned its portfolio over the past six months to ‘cushion’ itself from a fall from peak rates, according to manager Steven Cook.

In its interims to the end of September, the £1.5bn infrastructure debt trust revealed that 61.7% of the portfolio is now effectively fixed-rate.  

Talking to Investment Trust Insider, Cook explained this includes the use of interest rate swaps − contracts that usually involve exchanging a floating rate for fixed interest rate and vice versa. 

‘Where we are now, we think rates are as high as they’re going to get,’ he said. ‘They’re starting to fall. They’ve already have fallen in euros, while in sterling and dollars, they’ve started to fall but at a much lower pace. 

‘By swapping into fixed, we’ve giving ourselves a really good cushion if and when this progresses.’ 

The trust has also been favouring loans with a shorter weighted average maturity, increasing reinvestment flexibility as spreads evolve. 

Power over data centres

SEQI delivered a net asset value (NAV) total return of 5% over the period, driven by steady, predictable income and resilient credit performance. In doing so, it outperformed high yield bonds, which were up 3.6%.

As at the end of the reporting period, operational assets accounted for 88.3% of the portfolio, with 57.2% in senior secured debt and a focus on non-cyclical industries. 

The trust reported ‘exceptionally’ high loan repayments of £226m compared to £84m for the whole of the previous financial year, which allowed for £213m of new deals. 

Cook highlighted a new investment in Grange Backup Power, an Irish power project supporting data-centre operations, noting that data centres themselves had become ‘a bit less interesting’ due to stretched valuations.

‘It used to be our biggest single subsector of about 13% at its peak; its now down to under 10%,’ he said. ‘We’ve found much better opportunities looking at the power to data centre side.’ 

He highlighted the opportunity for long-term contracts in the space, saying: ‘These data centres need uninterrupted 24/7 power, and often the operators want renewable energy – these 24/7 blocks of green electrons. 

‘That’s very valuable because it paves the way for long-term contracts… A long-term contract with Microsoft is obviously a very valuable thing to have.’ 

SEQI also reduced its US exposure in recent months, which peaked at over 50%, citing ‘unhelpful’ policies, particularly in the renewables space, from the new administration.  

‘When you think it’s bad in the UK, it’s much worse in the US, with Trump’s mantra of drill, baby drill’, he said. 

‘A lot of offshore wind projects, for example, have been cancelled, sometimes mid-construction and tariffs have been creating issues for transport infrastructure.

‘The US has become a tougher place to find good deals, though it’s still obviously an enormous market, with great businesses.’ 

The country remains the trust’s highest weighting but Cook said ‘we’ll probably see it fall a bit more’.

SEQI repurchased £13.2m shares over the six months. Its discount widened slightly from 15.4% out to 16.8%, though still below the 19.2% average from its broader infrastructure peers. 

For those spooked by the recent spate of private credit scare stories, Cook explained that SEQI offers a low-risk option. 

‘Infrastructure is a really stable thing,’ he said. ‘Even in a recession, many of these assets perform well. Our relative volatility, our beta, compared to high-yield bonds, is about 50%. Lending to infrastructure is about half as much volatility as general corporate lending, and we’re able to outperform about 3%.

As a case in point, he added: ‘During the great financial crisis, Portuguese toll road companies had a higher rating than the Portuguese government.

‘Because investors were saying, there’s a real risk the government might go bust, but there’s no risk people will stop driving their cars.

‘That really speaks to the resilience of the asset class.’