Ian Cowie: two new investment trusts for inflation-busting income

Our columnist runs the rule over two new investment trust listings, which offer a combination of growth and income. 

In more normal times, you might expect investment trusts focused on infrastructure or the internet to attract a lot of attention. But two new trusts that combine both these hot sectors have had a somewhat cool reception so far.

Both have been overshadowed by fears that technology valuations are too frothy, as demonstrated by the debate about Deliveroo’s stock market flotation. Worries that inflation and interest rates will rise when the global economy recovers from the coronavirus have made many investors wary of stocks that promise ‘jam tomorrow’ but deliver low or no dividends today.

So the good news is that both the new internet infrastructure investment trusts aim to yield inflation-busting income - and one hopes to do so soon. Cordiant Digital Infrastructure (LSE:CORD) and Digital 9 Infrastructure (LSE: DGI9) will invest in mobile telephone masts, subsea communications fibre, data centres, terrestrial fibre and small cell networks - such as those needed to make 5G wi-fi work.

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For those of us whose cerebral software dates back to the 1950s, let’s just lump all that together under a general description: ‘the plumbing of the internet’. Demand for these services is likely to increase exponentially as people expect mobile devices to work faster and machines to communicate with each other in the ‘internet of things’.

This should generate good returns in future but CORD, whose shares listed in February, got off to a shaky start and continues to trade at a modest premium of 2% above net asset value (NAV). By contrast, the Association of Investment Companies (AIC) Infrastructure sector trades at an average premium of 11% to NAV.

Meanwhile, DGI9, whose shares start trading this week (1 April), had hoped that its initial public offering (IPO) would attract subscriptions of £400 million but raised only £300 million.

Both offer attractive yields; CORD is targeting 3% once fully invested and DGI9 is targeting 6%.

A spokesperson for DGI9 confirmed: “We will focus, primarily, on digital infrastructure with an existing customer base and have agreed to acquire Aqua Comms, a platform owning and operating some 14,300km of trans-Atlantic sub-sea fibre systems; the very backbone of the internet.”

If that deal is completed, it should save DGI9’s shareholders from the long wait for funds to be deployed and income to be generated that can blight subscribers to other investment trust IPOs. For example, this investor in Aberdeen Standard European Logistics Income (LSE:ASLI) almost lost patience waiting for it to allocate assets after its launch in December 2017.

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It seems I was not the only one to fret because the issue price of 100p slumped to 75p by March last year when I bought some more. But I am glad I waited for ASLI to buy warehouses and benefit from the boom in online shopping because the shares currently trade at 109p and yield dividend income of 4.5%.

Something similar might happen at DGI9 and, further out, CORD, offering investors a combination of growth and income. Simon Elliott, head of research at Winterflood Investment Trusts, pointed out: “The infrastructure sector has seen a huge growth in assets over the last decade with the twin attractions of high dividends and returns less correlated to markets.

“As confidence has grown in the asset class, it makes sense that we are seeing the launch of more specialist infrastructure strategies. CORD’s IPO raised £370 million and was the most successful since October 2018, when Smithson (LSE:SSON) raised £823 million.

“Expectations will therefore be high for DGI9, where its target total return of 10% per annum, including a dividend of 6p in its first financial year is ambitious.”

But wishing won’t make it so and not every acorn grows into an oak. Alan Brierley, a director at Investec Securities, warned of risks in this specialist area and told me: “It’s important to invest with a management team that has expertise, ability to originate assets and is free of conflicts with existing assets or funds.

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“CORD’s team has broad and deep capability and is led by Steve Marshall and Benn Mikula. Steve was president of the mobile mast operator, American Tower Corporation, helping to build it into a $100 billion digital infrastructure company, while Benn was formerly head of European technology investment banking at JPMorgan.”

Against all that, both CORD and DG19 are fighting the tide as assets flow out of tech stocks after a terrific bull run. But that might not matter to medium and long-term investors if the plumbing of the internet can pump up reliable and rising profits.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Aberdeen Standard European Logistic Income (ASLI) as part of a global portfolio of investment trusts and other shares.