Investing in Digital Infrastructure for Income?

[shawsdale]

I’m not sure if this is the appropriate board, or even if my query makes any sense, but here goes…

In search of further income diversification for my 2019/20 ISA I’ve been researching the infrastructure theme as I do not have much exposure in that area. I’m somewhat put off by the combination of high premiums the investment trusts in the sector, and also the potential political risks, particularly in a UK context, to PPP projects.

Given the growing significance of data transmission and mobile telecommunications, is it possible to invest for income in digital infrastructure?

Looking through the factsheet for the Henderson Far East trust I noticed one of its holdings is the Thailand Digital Telecommunications Infrastructure Fund which with a yield of the order of 6-7% looks enticing, but presumably not readily available to a UK retail investor:http://investor.digital-tif.com/home.html

There are some individual company options, in a European setting, Infrastrutture Wireless Italiane (Inwit)
an offshoot of Telecom Italia; America has American Tower http://www.americantower.com/investor-relations/
both of which seem to be available via Hargreaves, albeit with yields somewhat lower than I’d like.

There doesn’t seem to be a digital infrastructure fund readily available to UK retail investors.

Vodafone has crossed my mind as an option for accessing this area, but with a yield in double digits and a ‘falling knife’ share price chart it’s on that value opportunity/value trap fine line and may not be the best route in.

I’d welcome any thoughts both on the general theme of digital infrastructure and on potential income-generative investment routes into the area – be they funds, trusts or individual companies - I may have overlooked.

[RocketMan]

I like the idea of digital infrastructure, China has announced they will be pouring money into their own infrastructure and digital will be a factor there.

I agree looking in Asia for this kind of growth, I'm personally big on Japanese firms but I'm keeping an eye on getting more China in my portfolio. Might be worth looking around for some funds with a good Chinese exposure?

[shawsdale]

Thanks for your reply.
Yes, Asia and emerging markets would be interesting, but it's not easy to see how an overseas retail investor could get direct access.
In addition to the previously mentioned Thailand Digital Telecommunications Infrastructure fund, there is another Thailand vehicle, the Jasmine Broadband Internet Infrastructure Fund: http://www.jas-if.com/en/home.
Also in Asia is the Hong Kong listed China Tower: https://www.china-tower.com/inveen. Again, I'm not sure whether this is readily available to invest in.

More potentially accessible, albeit in a different sub-sector, is the US-listed data centre REIT Digital Realty: https://investor.digitalrealty.com/overview/investor-relations-overview/default.aspx which has been steadily increasing its quarterly dividend for several years such that the likely 2019 figure will be $4.32 against a share price of just under $113 (i.e. a post withholding tax yield of about 3.25%).
Any other suggestions would be welcome.

[RocketMan]

Digital reality looks interesting!

For US focus have a look at two Fidelity funds:

Fidelity Series Blue Chip Growth
Fidelity Select IT Services Portfolio

I was just looking around to screen any interesting funds that have a digital focus, US or emerging looks the most interesting.

[shawsdale]

Thanks for the suggestions.
Further exploration of the data centre theme leads me to another US-based data centre REIT, Core Site: https://investors.coresite.com/index.php/investor-overview which has a higher yield and higher recent dividend growth rate than Digital Realty.

[starquake]

I'd look at Microsoft and Amazon for exposure to this market - Microsoft are #2 - Amazon #1. Personally I feel Amazon are a little overpriced, but Microsoft has a good "security" play and is easier to use than Amazon arguably. Also Microsoft are offering "incentives" at moment to join them to existing on-premises clients, where Amazon don't have this. So I suspect theres going to be a lot more revenue in Microsoft to come. I have Microsoft and not Amazon in my portfolio. The income is minimal (at present) as the growth is so large at present most capital is going to gaining new customers. I am sure this will slow at some point. Some large companies have already publicly committed to be 100% publiccloud over next few years - and are migrating old cloud/existing DC's such as those in "Core Site"/"Other REIT" locations to public cloud - hence I would not personally risk my money in a REIT on the physical plant, as I think it's due a contraction around 2022 (I have reasons for this), when it's then worth jumping back in.

The other big provider DigitalOcean are private. It's arguable if in the future anyone will challenge their dominance, as Amazon are #1 for a reason (working in the field) - and it's arguable if they are cloud provider or retailer now.

Ref: other Data Centre REIT's I suspect they'll be mostly merge, but Equinix will be a big "jumping" on point to the Amazon/Microsoft clouds for corporate, as once you get to a sufficient size - this is more efficient on the interconnection front. I've seen Core Site/Digital Realty, but personally I wouldn't bet against Equinix - however even they will shrink I expect a little in next 2-3 years as we hit "native cloud migration" reductions.

[starquake]

I'd add for those that don't realise it, both Amazon and Microsoft run their own "fibre" backbones as managed infrastructure between their DC's. They are infrastructure plays as well as "cloud" ones - as it's no good having a cloud server you can't get sufficient bandwidth to.

[shawsdale]

Thanks to 'starquake' for that well-informed reply. I had noticed some of the growth rates in the data centre REIT sector starting to tail off, and did wonder about the sustainability of their returns in the face of both technological change and the place of Amazon and Microsoft in the digital ecosystem. Perhaps tower providers like Inwit in Italy and Crown Castle in the USA are the more suitable communications infrastructure assets to invest in?

[starquake]

Well - I'd also add Alibaba are a big play in this market in China... Cannot discount Alphabet/Google here too thinking about it this morning - Google are a minor player in the data centre infrastructure space today compared to the rest - I did miss Alibaba earlier, as I'm already quite exposed to it via funds (it's a major holding of >1 fund I hold).
https://www.canalys.com/newsroom/cloud-market-share-q4-2018-and-full-year-2018 for a list of places to keep an eye on.

Still my "personal" money is on Microsoft - as I feel their ability to get into more than just large corporate is being underplayed myself given how useful some of the other pieces they offer are. (Such as AAD and identity - converged logins between desktop PC, cloud, apps etc). I suspect Amazon's head start may start to erode due to the more powerful combination of identity and security Microsoft are offering.

On futures:
The interesting point here is "who" you use may be less of an issue in the mid-long term even in the converged cloud space due to Kubernetes (which can run on all clouds)... Again Amazon/Google/Microsoft have the main plays in this space, but it's interesting when I can develop a Kubernetes based stack and deploy to "any" cloud provider! Kubernetes is the one stack thats made my mind melt down a Rabbithole last few months from a work point of view - but as it's totally open source (but the project ran by Google) it's a really interesting play from Google/Alphabet...

Ref Towers and Crown Castle, I do need to investigate myself - it's on the list. You can't beat physical plant for comms - and you do need towers in lots of places for coverage...

[shawsdale]

Thanks once again.
You've made me realise I have very small indirect stakes in several of those large companies you mention via global and China-focused funds I'm invested in. In the meantime I will ponder further on Crown Castle, and one or two others.