Investment is the sincerest form of flattery, especially when it’s a foreign pension fund backing Britain with £8 billion of its 6 million savers’ money. Better still, the £254 billion behemoth that is boosting its exposure to UK equities is the Canadian investment group Caisse de dépôt et placement du Québec (CDPQ), and our French-speaking friends are not always that keen on perfidious Albion.
So investors should consider why the Canadian pension giant is seeking stock market bargains here and whether it is worth following suit. Charles Emond, its chief executive, explained that plans from the chancellor, Rachel Reeves, to increase infrastructure spending were “a huge opportunity and we’d like to be there in the early stages to see if we can do something”.
CDPQ might not be a household name over here, but it is one of the biggest infrastructure investors in the world and already owns British assets worth £17 billion, including the London Array Offshore Wind Farm, based in the Thames Estuary.
This small DIY investor is delighted to see British infrastructure get the thumbs up from the far side of the Atlantic. Greencoat UK Wind (stock market ticker: UKW) is the joint-highest yielding asset in my Isa, delivering more than 8.9 per cent tax-free dividend income.
The other top yielder in my portfolio is, like Greencoat, an investment trust: Tufton Assets (SHPP), formerly Tufton Oceanic Assets, a ship leasing specialist listed on the London Stock Exchange. But it’s only fair to say straightaway that neither has blown me away with capital growth, and one of these investments remains under water at present.
To be specific, I paid £1.45 a share for Greencoat in August 2023, but the stock now costs £1.14. Similarly, Tufton shares that I bought for 86p in August 2021, could be picked up for 87p on Friday.
Like the Canadian pension fund, however, this old boy is as interested in building long-term income to fund retirement as short-term fluctuations in capital values. On the former front, it is noteworthy that the independent statistician, Morningstar, calculates that Greencoat has increased shareholders’ income by an annual average of 7.6 per cent over the past five years, while Tufton has floated distributions 5.7 per cent higher over the same period. If either of those rates of ascent could be sustained, it would double Greencoat shareholders’ income in less than a decade, but it might take nearly 13 years for Tufton to do so.
It is important to beware that dividends are not guaranteed and can be cut or cancelled without notice. Even so, bargain-hunting income-seekers might be encouraged by the fact that Greencoat shares are trading at an eye-stretching 25 per cent discount to their net asset value (NAV), while Tufton stock is priced nearly 19 per cent below NAV.
Another attraction for income-seekers is that infrastructure, such as electricity generators needed to sustain economic activity, can help to preserve the real value or purchasing power of money against the insidious effect of inflation. Electricity, gas and water bills can rise to reflect the falling real value of money, even if it is politically inconvenient for them to do so.
The same is also true for shareholders’ income, which can be even more controversial. Hard-pressed householders might resent energy price rises but those whose pensions rely on income from the stock market might take a more positive view.
As usual, what you see depends on where you are standing. Protection from inflation, although not guaranteed, remains one reason to invest in infrastructure. To be specific, Greencoat has raised its dividends at least in line with the retail prices index measure of inflation since its flotation in 2013.
Less happily, there is the worrying possibility that the NAV numbers might prove misleading. Many folk hate wind farms, even those far out to sea, which creates another political risk, and turbine repair or replacement costs could prove higher than expected. Similarly, second-hand ship resale values might fall below forecasts.
Elsewhere on the infrastructure front in my “forever fund”, the London-listed investment trust, Ecofin Global Utilities (EGL), delivers less dividend income than either of the funds above but more capital growth and is now my sixth most valuable holding. I first invested in March 2011 in what was then called Ecofin Water & Power Opportunities (EWPO), before paying £1.52 in September 2019 for shares that cost £2.12 on Friday. They continue to yield 3.9 per cent, rising by 5 per cent on the same basis as above.
With nearly a third of its assets invested in the United States and 14 per cent in Italy, just ahead of the 11 per cent it has in Britain, Ecofin is internationally diversified. That could reduce the risk of political or regulatory intervention close to home.
People who can rely on the dear old taxpayer to fund their defined benefit or final salary pensions can afford to take a dim view of dividends. But almost everyone in the private sector now relies on defined contribution pensions, which are invested in the stock market whether they know it or not.
As the Canadian pension fund’s investment in British infrastructure indicates, these assets may deliver attractive returns. But investors should always beware that the price of high income today might be low or no growth tomorrow. Sometimes a yield that looks too good to be true can flatter to deceive.
Years after it fell from favour, might a tiny renewable energy business, based in Yorkshire, deliver explosive returns once again? ITM Power (ITM) makes machines that take electricity, often generated by wind farms, and passes it through water to create hydrogen.
Because the atoms of this gas are so small, there are big problems with storing and transmitting it. But electrolysis can make economic sense when energy independence is the priority or while wind farms are generating so much power that the alternative is to simply throw it away.
This business remains close to my wallet since the billionaire, Peter Hargreaves, first told me about it and I paid 41p per share in January 2010, before taking profits at 56p the next year. I then invested two per cent of my life savings at £1.24 in January 2020, as reported here at the time.
That prompted several cynics to dust off their schoolboy chemistry and argue why ITM couldn’t work. Knowing nothing about the science, I drew comfort from investing alongside one of Britain’s few billionaires.
Then, surprise, surprise, the share price soared to £5.39 in January 2021, when I took profits again, as also reported here. That was just as well because rising doubts about whether this business could ever make money prompted the price to slump below 30p earlier this year.
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Since then, rising sales of ITM electrolysis kits have re-energised enthusiasm and the shares have soared 40 per cent higher since January. Hoping there might be further to go, this eternal optimist bought a few more at 50p on Wednesday. Encouragingly, they hit 58p on Friday.
Scoff if you like, but beware: perennial pessimism is an easy way to simulate wisdom about the stock market but it ain’t the way to make money.
