Which trusts will rise as interest rates fall?

Colette Ord, Head of Real Estate, Infrastructure and Renewable Funds Research at Deutsche Numis, said: “We believe that infrastructure investment companies are likely to be a key beneficiary of lower interest rates. In periods of lower bond yields, the inflation-linked, contracted cashflows generated by this sector are generally valued more highly by equity markets.

“Lower risk core infrastructure cashflows should perform well, as these are often seen by investors as bond proxies, although we also believe the market often overlooks the ability for infrastructure investment trusts to grow earnings through active management. We like International Public Partnerships, which displays a number of our preferred risk adjusted return characteristics, along with exposure to some key infrastructure growth trends such as the energy transition.

“We do not think that the current 22% discount reflects the portfolio return potential, which is underpinned by a high degree of revenue visibility. The current dividend yield of 7.7% is fully covered by earnings, and even if no further investments are made, the company could pay a growing dividend for at least a further 20 years.

“In addition, ‘jam tomorrow’ stocks, where investors need to be patient for their returns, were hard hit as interest rates rose, and therefore should be beneficiaries as rates come back down, which will be helpful for the Private Equity and Growth Capital sectors.

“For example, Seraphim Space Investment Trust may benefit from improved sentiment as its portfolio of space tech companies matures. Perhaps more significant than the change in interest rates is a focus on defence spending, which will be positive for a number of portfolio companies which provide services such as satellite constellations with near-real-time imagery, satellite communication antenna and logistics and waste management.”

Ashley Thomas, Analyst at Winterflood Securities, said: “While the pace of interest rate declines remains uncertain given the volatile geopolitical backdrop, any further declines in UK interest rates, particularly ten-year gilt yields, should be beneficial to the infrastructure, renewable energy infrastructure and property sectors.

“Within the infrastructure sector, falling gilt yields should result in lower discount rates, which, put simply, would likely lead to higher valuations today. This discount rate effect would be more meaningful for longer life, lower risk ‘core’ economic infrastructure assets such as the water, energy, transport and accommodation investments held by one of our picks, HICL Infrastructure, where nearly 90% of portfolio revenues are contracted or regulated.

“HICL’s portfolio has an average asset life of more than 29 years, with 65% of the portfolio based in the UK. We calculate that a 1% reduction in HICL’s 8.1% discount rate would increase its net asset value (NAV) by around 11%, which should add around 5% to the share price given the trust’s 24% discount to NAV.

“The recent all-cash offer from British Columbia Investment Management for BBGI Global Infrastructure (which has a similar sector exposure to HICL albeit only 33% in the UK), at a small premium to its December 2024 NAV, has highlighted the attraction of secure regulated/availability-based revenues. Remember, availability-based revenues are paid whether the assets are used or not, usually through government contracts, and so are particularly valuable in the context of an increasingly uncertain macroeconomic outlook.

“Renewable energy generators should also benefit from lower long-term gilt yields and therefore discount rates. Bluefield Solar Income Fund is 100% UK based and currently has an 8.0% discount rate. A reduction of 1% in the discount rate would increase NAV by around 12%, which should add around 18% to the share price given the 21% discount at which the shares trade.”

Rachel May, Research Analyst at Shore Capital, said: “The pure-play solar funds are currently trading on the widest discounts on record despite a growing number of disposals at values consistent with the fund’s balance sheets, demonstrating the ongoing discount between public and private valuations.

“We like Foresight Solar Fund, trading on a 30% discount with a 10% yield. It offers exposure to a portfolio of solar assets located across the UK, Spain and Australia, with a development pipeline of Spanish battery energy storage system (BESS) and more solar projects. The trust benefits from a high proportion of long-dated inflation linked revenues, providing good visibility over future cash flows and dividend cover: 88% of revenues are contracted for the current year, and the dividend is expected to be more than fully covered.

“The trust’s divestment strategy is progressing well. The trust disposed of a 50% stake in its Spanish portfolio at a 21% premium to book value, and the sale process for the Australian portfolio remains ongoing, with a deal expected later this year. The board has been extremely proactive in its attempts to narrow the discount having recently announced that a further 75MW of projects have been identified for disposal, with the proceeds being used to ‘facilitate enhanced liquidity’ for those shareholders seeking it.”

Emma Bird, Head of Investment Trusts Research at Winterflood Securities, said: “Property investment trust share prices have been reasonably correlated with UK gilt yields in recent years, with discounts tending to widen as yields rise and vice versa. This reflects the deterioration in sentiment towards the asset class as interest rate expectations rise, fuelling concerns over demand for debt-funded property acquisitions, as well as comparatively less attractive yields offered by property investment trusts in a higher rate environment. All of which means a decline in market interest rates should be positive for sentiment, potentially leading to a narrowing of discounts from current wide levels, as well as being supportive for underlying asset valuations and therefore NAVs.

“Furthermore, a cut in the Bank of England base rate should correspond with a reduction in the sterling overnight index average rate, or SONIA, reducing debt costs for funds with unhedged floating rate debt using SONIA as a reference rate. One potential beneficiary in this context is Custodian Property Income REIT, which has 18% of its borrowings (£31m) subject to a variable rate linked to SONIA and should therefore see reduced debt costs and subsequently higher earnings as SONIA falls.”

Markuz Jaffe, Analyst at Peel Hunt, said: “We highlight three trusts that we believe are set to benefit from interest rate cuts and a downward trajectory in risk-free rates. The first is International Public Partnerships (INPP). It has successfully delivered a progressive dividend policy since launch from investing in a portfolio of infrastructure assets spread across availability-based social infrastructure, regulated investments and some operating businesses.

“The portfolio is around 73% weighted to the UK and some of the investments benefit from government-backed cash flows, so there is a beneficial link to reductions in gilt yields, and any impact this might have on underlying asset pricing. INPP recently committed to fund up to an additional £140m of capital returns to investors, taking the total programme to £200m and supported by further realisation activity, with the company already having been active in selling assets to reduce leverage and provide liquidity to shareholders. INPP currently trades on a 22% discount to end-December 2024 NAV and offers a yield of 7.7%.

“Another we like is Greencoat UK Wind (UKW), which offers a pure play on the UK wind sector (both onshore and offshore wind assets) and has built a strong track record of cash generation, delivering dividends that remain explicitly linked to UK inflation (RPI) as part of an attractive total return profile.

“As a result of its geographic focus, UKW is clearly exposed to sterling base rates through the combination of changing gilt yields driving underlying asset valuations, investors’ dividend yield expectations influencing the share price, and any potential reductions in financing costs. In recognition of the company trading at a discount to NAV, the board recently committed a further £100m to its share buyback programme, taking the total commitment to date to £200m – one of the largest in the listed infrastructure investment company universe. UKW currently trades on a 22% discount to end-March 2025 NAV and offers a yield of 8.8%.

“Finally, HarbourVest Global Private Equity (HVPE) offers investors global exposure to private companies through a fund-of-funds structure. HVPE has delivered a five-year annualised NAV return of 14% from this highly diversified portfolio, which accesses primary, secondary and direct co-investments across buyout and venture/growth equity. At the beginning of 2022, HVPE’s discount was around 15%; by early October 2022, this had widened to 51%. More recently, HVPE has announced three important initiatives that should benefit shareholders through maximising returns and addressing the discount. The distribution pool, which supports buyback activity, has seen its allocation doubled from 15% to 30%, the investment structure is to be simplified via a dedicated separately managed account with HarbourVest Partners, and a continuation vote is being introduced for the 2026 AGM. HVPE currently trades on a wider-than-average discount of 43% to the end-March 2025 NAV and we see scope for this to narrow.” 

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