24th July 2026
Regular readers will know we’ve been banging the drum for core infrastructure investment trusts for some time with HICL Infrastructure (HICL) and International Public Partnerships (INPP) both sizable holdings in our multi-asset funds. High quality, defensive underlying assets combined with compelling relative valuations have underpinned the investment thesis where the ability to capture premium yields over those available from corporate bonds from portfolios with low economic sensitivity and low counterparty risk seemed like an inefficiency worth exploiting. In the spring of 2025 with both HICL and INPP trading on wide discounts to net asset value (NAV) and credit spreads close to historic tights, this yield premium to the sterling investment grade market hit around 330bps, with the pickup over the 20-year gilt more like 400bps. It’s important here to remember that we’re comparing progressive quasi-real (i.e. after inflation) dividend yields with fixed nominal coupons, and also to highlight the self-help measures these trusts had taken around capital allocation, helping drive NAV-validating disposals, deleveraging and accretive share buybacks. The relative value argument looked even more compelling when accounting for share prices. Adjusting the portfolios weighted average discount rate (less the ongoing charges ratio) to reflect the share price discount implied returns of over 11% at that point in time, a whopping 570bps pick up on the prevailing yield to maturity of the corporate bond market.
True to our unconstrained valuation driven approach to portfolio construction, we’ve been very happy to harvest this additional return. Since we introduced the two trusts, INPP has delivered a total return of 42% and HICL 30% which compare well with the 6% of the IA Sterling Corporate Bond Sector and 3% for IA UK Gilts.
NAV returns have been good over the holding period, but performance has also been driven by a narrowing in share price discounts which today sit at 7% for INPP and 16% for HICL. Dividend yields have compressed to 6.2% and 6.3% as a result, and share price implied total returns have fallen to around 8%. At the same time, government bond yields have risen with the 20-year gilt currently trading at 5.7% resulting in a much narrower premium over risk-free rates and corporate bonds than when we started investing.
For investments that have traditionally been viewed by a wide constituency of investors as yield plays this compression poses challenges. If judged purely as bond proxies, there is a limit to how much further these trusts can re-rate given yields on a NAV basis offer no discernible pickup versus those available from government bonds.
Fortunately, Boards and management teams recognise that we are now operating in a very different world of higher interest rates and that trundling along as a YieldCo is likely to lead to stasis and waning shareholder demand. Both Companies have gently been evolving their portfolios in recent years with the direction of travel likely to accelerate as we move forward. At HICL’s recent capital markets day they set out plans to target a 10%+ annual return versus the 8.5% NAV total returns delivered since IPO. The portfolio already has a mix of yield and growth assets but will introduce a new category of higher returning ‘enhancers’ which will boost overall portfolio returns. News this week from INPP confirmed a similar direction of travel, highlighting how almost £500m of committed or invested capital has been deployed over the past few years at a weighted average IRR of 11%+ which is well above the portfolio’s 9.1% discount rate. The innovative and transformational investment in Sizewell C being a case in point which Dan wrote about here last summer (Going Nuclear).
Importantly, given current discounts to NAV, the pivot towards higher returning assets will be funded internally from a combination of disposals and excess operating cash flow. Recognising the cohort of yield focussed shareholders on the register, both Companies remain committed to progressive dividend policies. Given low cash cover of 1.1x, striking the right balance between growing the dividend whilst investing in lower yielding but faster growing projects will require careful management, particularly given the profile of higher yielding PPP investments where the cadence of hand backs starts picking up in the years ahead. On a similar theme, investors will be watching carefully for how portfolio evolution impacts overall risk where HICL and INPPs traditional defensive characteristics have stood them apart from the core plus infrastructure plays available in the market. There are also inevitable risks around execution and we’re aware that past forays into new sectors haven’t always gone smoothly, HICL’s investment in Affinity Water being a prime example.
Despite these risks, we are supportive of the evolving strategy and recognise the greater risk is that of doing nothing. Some will argue that excess cash should be returned to shareholders (although that argument weakens as share price discounts narrow), but we ultimately want as broad an investment universe as possible and want well-managed, large, liquid trusts offering exposure to differentiated underlying assets to survive and prosper. As such, deploying capital to drive necessary strategic evolution might often be the right thing to do even if the buyback maths (over short time horizons) says otherwise. The journey towards higher return targets won’t happen in a straight line, but clean balance sheets, deployable excess cash flow and the managers’ track record of recycling capital in an efficient and return enhancing manner suggest that the dual aim of growing dividends and delivering higher total returns is achievable.
The easy money from re-rating may well have already largely been made (particularly in INPPs case), but the investment case in our view is far from exhausted. Current valuations are probably best described as fair rather than compelling, but these well-set plans have the ability to open a fresh chapter of returns driven by thoughtful portfolio evolution, consistent execution and ongoing communication with investors. We remain optimistic that both trusts can continue to deliver as well as providing attractive diversification to equity and bond risk in our funds’ portfolios.
Ben Mackie – Senior Fund Manager
Subscribe to receive our latest commentary and insights straight to your inbox.
For professional advisers only. This document is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”), the investment manager of the MI Hawksmoor Distribution Fund (“Fund”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. The Fund’s Authorised Corporate Director, Apex Fundrock Ltd (“Apex Fundrock”) is also authorised and regulated by the Financial Conduct Authority. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contain have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Hawksmoor, its directors, officers, employees and their associates may have a holding in the Fund. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC26739.
