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My asset allocation: Shane Bennett of Cathedral Financial Management

The research analyst sees opportunities in infrastructure funds, despite Labour's pledge to abolish private finance initiatives.

My asset allocation: Shane Bennett of Cathedral Financial Management

The listed infrastructure fund sector offers value, according to Shane Bennett, a research analyst at Cathedral Financial Management.

Shares in a host of infrastructure investment companies sold off last September, after the Labour party said it would abolish private finance initiatives if it got into power.

Things then moved from bad to worse when several funds, including HICL, John Laing Infrastructure and International Public Partnerships, were hit by the collapse of outsourcer Carillion in January.

This negative run of news caused HICL and John Laing’s shares to sink to a four-year low in early April. Around that time, HICL’s discount to net asset value reached 9%, while John Laing’s fell to 8.5%. This marked a significant change from the summer of 2016, when the investment trusts traded at premiums of 31.9% and 22.3%, respectively.

Since then, share prices have started to recover, and Bennett believes several of these funds still look attractive. ‘Some generate high single-digit internal rates of return, offer a generous yield and provide some inflation hedging,’ Bennett said.

Talking tactics

Cathedral’s investment team tries to avoid having fixed assumptions about asset classes, constructing portfolios using a combination of top-down and bottom-up factors. These include the macroeconomic environment, absolute and relative valuations, market sentiment and liquidity.

‘As the market backdrop changes, we take a view on whether to implement a strategic or tactical shift,’ Bennett said. ‘We decide whether to adapt to longer term trends or capitalise on potential market opportunities.’

The team reviews asset allocation and fund selection regularly and the investment committee meets formally every fortnight to discuss market changes.

The investment team recently reduced European high-yield exposure due to high valuations and spreads moving to historic lows. ‘In addition, we thought the European Central Bank reducing quantitative easing would reduce downward pressure on yields,’ said Bennett.

The proceeds were invested in a flexible global macro bond fund, which can move to negative duration. This reflects a broader shift within portfolios from dedicated government and corporate bond funds into strategic bond funds, as yields and spreads have contracted.

Bennett highlighted UK equity fund holdings as performance drivers over one and three years, particularly those funds with small and mid-cap exposure. Japanese and European equity positions were key contributors on a three-year basis.

Data to: 3 May 2018

*Other includes alternative investment strategies/undisclosed/others.

**Excludes platform charges and adviser fees. Includes charges on constituent funds.

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