Should HICL Infrastructure Company Ltd be allowed on HYP-P as it is akin to a REIT

[Dod101]

That argument could of course open the door to all sorts of ITs such as RIT Capital Partners and Caledonia to mention only two of them They both invest in assets that it would be difficult for the individual to access and I have no doubt that there are a number of others.

Not comparable. Those have only a smattering of unlisted assets, less than 10%.

Companies like HICl, BLND, TRIG, PHP, UKW, SGRO, JLEN, DIGS, etc, etc, etc have 100% unlisted assets.

We must be looking at different companies. The latest Annual Report for Caledonia Investments to 31 March 2019 lists 31.9% in unquoted investments and there are some private equity holdings as well of at least 2.9%

As for RIT, well most of its holdings I would find great difficulty in even knowing where to start to buy them. Quoted equity is only 6.7% in their latest accounts to 31 December 2018.

The companies that you mention are run mostly as conventional property companies, some of which are partly or wholly organised as REITs. The fact that they are REITs does not change the fact that they are property companies as well. HICL is neither. It is an investment company. Not sure where this is getting us but let us at least get the facts straight.

Dod

[mc2fool]

The companies that you mention are run mostly as conventional property companies, some of which are partly or wholly organised as REITs. The fact that they are REITs does not change the fact that they are property companies as well. HICL is neither. It is an investment company.

Of course HICL isn't a REIT, although it is in part a property company.

The fact that HICL & UKW etc are ITs doesn't change the fact that they are infrastructure & renewable energy (wind) companies as well.

PHP builds/buys and runs GP facilities, and happens to be a REIT.
UKW builds/buys and runs wind turbines, and happens to be an IT.
DIGS builds/buys and runs student accommodation, and happens to be a REIT.
HICL builds/buys and runs hospitals, schools, roads, railways and a few other things, and happens to be an IT.

At the highest level I don't see any difference between them just 'cos of their legal status. Methinks you should look at what a company does rather than just its legal status and such labels attached to it.

Many REITs are also members of the Association of Investment Companies. https://www.theaic.co.uk/aic/find-compa ... earch_form Do you "disallow" those because of that? Only allow REITs that aren't AIC members?

(P.S. On RCP, I went by the AIC listing that says they have 10% in "Direct Investment" and didn't check any further. Sorry.)

[MDW1954]

I agree that HICL is the type of company that should be permitted.

TJH

Me too.

MDW1954

[csearle]

Of course HICL isn't a REIT, although it is in part a property company.

The fact that HICL & UKW etc are ITs doesn't change the fact that they are infrastructure & renewable energy (wind) companies as well.

PHP builds/buys and runs GP facilities, and happens to be a REIT.
UKW builds/buys and runs wind turbines, and happens to be an IT.
DIGS builds/buys and runs student accommodation, and happens to be a REIT.
HICL builds/buys and runs hospitals, schools, roads, railways and a few other things, and happens to be an IT.

I don't suppose you have a nice collective term for these companies in whose underlying investments one cannot directly invest?

I ask because if there were such a useful term then we could either:

1. Start up a board just for them. In this case posts about them on HYP-P could be moved there leaving a link,
2. Declare them ok on HYP-P,
3. Ban them explicitly on HYP-P (like ITs), which makes things clear but is perhaps somewhat harsh, or
4. Something else

It would be nice to reach a consensus, declare here how they will be treated in future, lock this thread for reference, and move on.

Chris

[seagles]

They are Investment Trusts and we have a board for them. Same as we have a board for REITs.

[csearle]

They are Investment Trusts and we have a board for them. Same as we have a board for REITs.

Well yes, but it appears that they belong to a group of investment trusts that have a particular different quality pertinent to our HYPs. I was just wondering if they could be hived off somewhere under a specific name to highlight this difference. I'm not particularly wedded to the idea.

Maybe just as REITs have been catered for in HYP-P because of this difference, perhaps these variant ITs (vIT) should be too and for the same reason? Would be good to have a name for them (as opposed to the more general term investment trusts) and for most of us to agree whether they should be acceptable in HYP-P or not.

Chris

[seagles]

Maybe it is time to revise guidance and allow "any higher yield equity" that is in the FTSE350. That way those HYPers who have moved or are moving into high income ITs can discuss them in one place rather than obliquely mention them in the portfolio but not allowed to actually discuss them in detail. Radical I know.

[csearle]

Maybe it is time to revise guidance and allow "any higher yield equity" that is in the FTSE350. That way those HYPers who have moved or are moving into high income ITs can discuss them in one place rather than obliquely mention them in the portfolio but not allowed to actually discuss them in detail. Radical I know.

Yes that debate raged a while back. I'm scared to comment as I have friends on both side of the fence.

[Lootman]

Maybe just as REITs have been catered for in HYP-P because of this difference, perhaps these variant ITs (vIT) should be too and for the same reason? Would be good to have a name for them (as opposed to the more general term investment trusts) and for most of us to agree whether they should be acceptable in HYP-P or not.

One attempt at that might be that the Guidelines include discussion and selection of publicly listed funds where the underlying is private and therefore uninvestable by individuals directly. The key words therefore might be public versus private, and listed versus unlisted.

I can think of some other examples like timber and pipelines, that are typically structured as LLPs, trusts or REITs. They usually have high yields and can have a favourable tax treatment.

[mc2fool]

PHP builds/buys and runs GP facilities, and happens to be a REIT.
UKW builds/buys and runs wind turbines, and happens to be an IT.
DIGS builds/buys and runs student accommodation, and happens to be a REIT.
HICL builds/buys and runs hospitals, schools, roads, railways and a few other things, and happens to be an IT.

I don't suppose you have a nice collective term for these companies in whose underlying investments one cannot directly invest?

Normal trading companies.

PHP builds/buys and runs GP facilities, and happens to be a REIT.
UKW builds/buys and runs wind turbines, and happens to be an IT.
SSE builds/buys and runs power stations (inc. wind turbines), and happens to be neither a REIT or IT.
DIGS builds/buys and runs student accommodation, and happens to be a REIT.
HICL builds/buys and runs hospitals, schools, roads, railways and a few other things, and happens to be an IT.
RDSB builds/buys and runs oil wells, refineries and petrol stations, and happens to be neither a REIT or IT.
:

[TUK020]

Maybe just as REITs have been catered for in HYP-P because of this difference, perhaps these variant ITs (vIT) should be too and for the same reason? Would be good to have a name for them (as opposed to the more general term investment trusts) and for most of us to agree whether they should be acceptable in HYP-P or not.

One attempt at that might be that the Guidelines include discussion and selection of publicly listed funds where the underlying is private and therefore uninvestable by individuals directly. The key words therefore might be public versus private, and listed versus unlisted.

I can think of some other examples like timber and pipelines, that are typically structured as LLPs, trusts or REITs. They usually have high yields and can have a favourable tax treatment.

Some ITs have investments in foreign listed companies that are not directly investable in an HYP (as in Bland Annuity Substitute). Following the spirit of diversification, it is good to get coverage via vehicles such as HFEL.

[Dod101]

Except for those who are wedded to discussion for the sake of discussion I think this is a non issue. I prefer to get on looking after my HYPish portfolio.

Dod

[Gengulphus]

Of course HICL isn't a REIT, although it is in part a property company.

The fact that HICL & UKW etc are ITs doesn't change the fact that they are infrastructure & renewable energy (wind) companies as well.

PHP builds/buys and runs GP facilities, and happens to be a REIT.
UKW builds/buys and runs wind turbines, and happens to be an IT.
DIGS builds/buys and runs student accommodation, and happens to be a REIT.
HICL builds/buys and runs hospitals, schools, roads, railways and a few other things, and happens to be an IT.

I don't suppose you have a nice collective term for these companies in whose underlying investments one cannot directly invest?

There seem to me to be two interrelated key points about this, namely who manages the underlying investments and diversification. HYPs are basically distinguished from portfolios of high-yield 'funds' (*) by the fact that it's the HYPer themself who manages the investments (and especially their diversification), not a fund manager or a computer. The TMF HYP Practical board was originally intended to be about how one goes about that in practice and the TLF HYP Practical board was originally intended to be a continuation of the TMF HYP Practical board, and if that intention is unchanged (see near the end of this post), then discussing approaches that delegate the job of managing the investments to a fund manager or a computer is about as welcome as a heckler at a Woodworking Practical workshop who tells the attendees that it's far easier to pay someone else to do the job.

That is basically the motivation behind the rule against 'funds' in a HYP, which was the slightly-too-prescriptive (**):

"The type of strategy discussed on this board invests in shares:
...
• As a diversified portfolio of directly-held shares, to reduce risk and costs. Holding shares indirectly via funds is not part of the strategy, due to the fund management fees - this includes not using investment trusts and ETFs (also known as iShares).
...
A HYP strategy doesn't have to adhere 100% to these hallmarks. But if a strategy deviates from them in a major way, such as having a significant proportion invested in funds or frequently selling shares after a shorter holding period, then it is off-topic for this board."

on TMF, is the arguably-oversimplified:

"Investment Trusts or open ended funds should not be included, although REITs are acceptable."

on TLF, and that various HYPers have their own variants of - mine (from earlier in the thread) being:

"As far as my own HYP is concerned, the rule is that investment trusts and similar companies are not permitted into it if a substantial proportion of their underlying investments are ones that my HYP could invest in directly."

They're all aimed at saying that what matters is that the board is basically about the practical details of managing a portfolio's underlying investments and their diversification in line with HYP strategies oneself. Not in every last detail - the HYPer does delegate the job of choosing exactly which power stations, housebuilding sites, wind turbines, commercial properties, etc, to invest in to the managers of the companies - but the HYPer does decide on the high-to-medium-level split of the investments, and arguments about whether they should be doing that don't belong on a board about the practical details of doing it.

So my view is that at least as a reasonable approximation, it's "generalist investment trusts" that the guidance should be against, rather than an unqualified "investment trusts". I can invest in UKW or HICL and still be in control of my HYP's split between alternative energy, infrastructure and other sectors, whereas if I invest in City Of London IT (CTY) or Merchants Trust (MRCH), I'm handing over that control to a fund manager. That approximation does need a bit of careful interpretation, as most investment trusts have some degree of specialisation - e.g. CTY's investment objective is "To provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange.", so it's specialised to the extent of investing mainly in LSE-listed shares and not in shares of the many thousands of other publicly-traded companies in the world. So perhaps the guidance should be "Investment trusts and open-ended funds should not be included, except that REITs and other sector-specialised investment trusts are acceptable."?

That still leaves the issue of country/region-specialised generalist investment trusts, such as those specialising in US, European or Far-East companies - personally, I permit them, but it's only on the basis that they're restricted to being a small proportion of my HYP (10% of it maximum for all such investment trusts combined, and it's currently only 2-3%) and so their effect on my HYP's sector diversification is small. I.e. basically, I include them under the TMF guidance's "A HYP strategy doesn't have to adhere 100% to these hallmarks." let-out, which isn't explicitly in the TLF guidance but various moderator comments about not rules-lawyering, nit-picking, etc, lead me to believe are effectively in it.

So basically, I think the restriction is basically a consequence of the intended purpose of the HYP Practical board. That does of course mean that "if that intention is unchanged" above is a very big "if"! And I'm not saying that it must be unchanged - that's up to stooz and Clariman as owners of the site. I am however saying that until and unless they change that intention and tell us clearly what their revised intention is (and if so, renaming the board to match it would probably also be a good idea), there is only that original intention to go by when writing the board's rules/guidance. Furthermore, this thread's subject is clearly about a detail of the rules/guidance rather than about the much broader question of what the intention should be - so if anyone wants to discuss whether it should be changed, I'd suggest they start a separate thread about it. At least IMHO, such a change would require a much wider review and probably rewrite of the board guidance to avoid it being out of step with whatever that changed intention is - and the changed intention needs to be decided upon before that review/rewrite can sensibly be embarked on.

(*) By 'funds', I mean unit trusts, OEICs, investment trusts, ETFs, etc, generically.

(**) It's slightly too prescriptive because all that really matters is that the HYPer has chosen to manage the portfolio themselves - whether they've done so because of the management fees, because they want to do so or for any other reason doesn't really matter.

Gengulphus

[csearle]

...

Thanks for that incredibly constructive input. C.

[Dod101]

Gengulphus has more experience than I in the history of how the HYP Practical Board came about and I can quite see the logic of his comments. There is though another matter and that is that buying any form of investment company (which is what for instance HICL is) involves other factors such as the NAV per share and whether the shares are standing at a premium or discount to that NAV. Some, even professionals, see this as a complicating factor because why would you buy an asset at say 10% over its NAV? HICL may be a particular type of collective investment but it is still a collective investment and that to me should rule it out of consideration for the HYP Board. As for generalist v other ITs, I think that is just splitting hairs and is a likely to cause problems as anything else.

However as I said I have, and I think most people will have, better things to do with my time than argue about this. Fundamentally I think it is a non issue.

Dod

[Lootman]

buying any form of investment company (which is what for instance HICL is) involves other factors such as the NAV per share and whether the shares are standing at a premium or discount to that NAV.

But surely assessing whether price is expensive or cheap compared with underlying value is a significant part of any type of investing. For instance one common metric used for shares is the price-to-book ratio, which involves looking at the estimated value of the assets of a company and comparing it to price. In fact it is an easier process with ITs because the valuation estimate and calculation is already done for you.

Although if premia or discounts really bothered you then you could instead use another type of collective, like an OEIC or an ETF, many of which are invested in a single sector, and so qualifiying under some of the suggestions made earlier.

Some, even professionals, see this as a complicating factor because why would you buy an asset at say 10% over its NAV?

Do they? Take bonds, for instance. They routinely go to a premium or discount depending mostly on how the coupon rate compares to prevailing interest rates for the same duration. Price is assessed by looking at an analysis of future cashflows. And since HY shares are mostly bought for income, according to the idea here, then one could make the same argument for HY shares, i.e. they should go to a premium because their yields are higher than the market as a whole. And we have all seen cases of where it is mostly the dividend that props up the price of a HY share, leading to a rapid fall when the dividend is cut or abolished.

So i don't think the process of assessing value versus share price is that unusual at all. Nor is buying at a premium.

[Gengulphus]

... There is though another matter and that is that buying any form of investment company (which is what for instance HICL is) involves other factors such as the NAV per share and whether the shares are standing at a premium or discount to that NAV. Some, even professionals, see this as a complicating factor because why would you buy an asset at say 10% over its NAV? ...

I'd say that falls under the "Additional criteria may be used by individuals." part of the current guidance. Some will use it and/or other capital safety checks, some won't - and it's a common type of capital safety check for shares other than investment trusts. There is the practical difficulty with applying them that one can only really work out the current net asset value of assets for which there is a market that frequently quotes prices for them - otherwise one has to fall back on book values and maybe occasional re-valuations, and so the figures one has are less up-to-date. So for instance, BLND's, HICL's or UKW's current net asset values are less accurately knowable than CTY's - which gives one answer to your question, namely that one might think one had reason to believe the NAV figure one has is lower than the actual NAV.

But probably the more usual reason is that one finds it highly inconvenient to own the type of asset directly and regards it as a sufficiently desirable type of investment to own to be willing to pay the premium to own it in the convenient collective-investment form.

... HICL may be a particular type of collective investment but it is still a collective investment and that to me should rule it out of consideration for the HYP Board. ...

Just about any company of a size that might qualify for HYP Practical is a collective investment, the underlying investments being its subsidiaries (not my own thought, just my paraphrase of mc2fool's point in post #238512 above).

Gengulphus

[Alaric]

And since HY shares are mostly bought for income, according to the idea here, then one could make the same argument for HY shares, i.e. they should go to a premium because their yields are higher than the market as a whole. And we have all seen cases of where it is mostly the dividend that props up the price of a HY share, leading to a rapid fall when the dividend is cut or abolished.

If you look at the price to be paid per £ 1 of dividend income, It's the likes of Diageo and Unilever that are more expensive than say Shell or other higher yielders at the big cap end of the FTSE 100.

A plausible reason is that the market as a whole puts a premium on shares where there's a history of dividend increases and where there's a belief the dividends are paid from profits.

[mc2fool]

There is though another matter and that is that buying any form of investment company (which is what for instance HICL is) involves other factors such as the NAV per share and whether the shares are standing at a premium or discount to that NAV. Some, even professionals, see this as a complicating factor because why would you buy an asset at say 10% over its NAV?

So you keep on saying, but as has already been pointed out to you, REITs also have a net asset value and stand at a premium or discount to that NAV. Indeed, this week's Investors Chronicle reports that Segro (SGRO, regularly discussed on HYP-P) stands at a 16% premium and Unite (UTG) is at a 28% one.

Yet you don't seem to be arguing for REITs to be "disallowed" -- not even the ones that happen to be members of and listed on the Association of Investment Companies. So, methinks your position is inconsistent.

HICL may be a particular type of collective investment but it is still a collective investment...

Yes and no. Yes, in the broad sense that really all listed companies are collective investments. The shareholders of RDSB, PHP & UKW have all made a collective investment in the managers of those companies business efforts in the oil, GP surgery and wind power sectors, respectively.

No in the narrow sense because, as Selftrade's FAQ puts it, "A collective investment is where a fund manager pools your money with that of other investors to purchase securities."

But if you don't agree with that definition, perhaps you could explain why you consider HICL or Greencoat UK Wind (UKW), etc, a "collective investment" but you don't consider REITs such as Segro (SGRO) or GCP Student Living (DIGS) ones. I really don't see a difference (and, BTW, DIGS is a member of the AIC.)

However as I said I have, and I think most people will have, better things to do with my time than argue about this. Fundamentally I think it is a non issue.

Yet, if I've counted correctly, the person who has made the most posts in this thread is you ...

[Dod101]

Ok. Then just get rid of the ban on collectives on the HYP Practical Board because I think any distinction is very artificial.

I am an old man and surely I am allowed to change my mind occasionally.

Dod