As the hunt for yield becomes an increasingly daunting prospect, investors across the board are looking further and further afield in search of fixed revenue streams.
But Ellis, manager of the GCP Infrastructure Investments Trust, believes that the most watertight opportunities reside in the UK.
“We look solely at the UK,” he said. “When you are looking for credit opportunities you always hunt down the safest bet, and the UK government is the safest bet – the last recorded event of a default in the UK public sector was in 1594.
“Also, there is the ability to print sterling. So, whatever the effects on inflation etcetera, UK public sector debts will always be paid on time and in full.”
Ellis’ conviction is backed by his portfolio, which features a 90/10 split between England and Scotland respectively.
However he explained that, given the trust’s long-term outlook, there are key differences in the investment characteristics of the public and private sectors.
He said: “When looking 20 or 30 years ahead in the private sector, it is almost impossible to conduct full credit due diligence because the biggest investment credits have a habit of changing dramatically in that time-scale.
“A triple-AAA covenant today could be subject to a leveraged buy-out in five years’ time and become an entirely different proposition. If you are on a 30-year loan perspective to that company there is not much you can do about it. The UK public sector is very different, so we do not expose ourselves to the private sector.”
Ellis’ biggest weighting to a single asset class is his 34% conviction to the private finance initiative sector.
But the position he is most bullish on is the exposure to renewable energy, via which he expects to reap the benefits of upwards inflation.
“Our key exposure in terms of longer-term cash flows is to the risk of inflation, which is the key risk to any long-dated fixed income portfolio,” he explained.
“However, if we do see spikes in inflation we are well-protected against that. Most renewable energy projects are invariably linked to the retail price index, and occasionally the consumer price index – we always seek to generate exposure to the upside arising from inflation spikes, and 70% of our portfolio stands to benefit from those spikes.”
By asset class, renewable energy is represented in Ellis’ portfolio by rooftop solar (22%), biomass (19%), onshore wind (13%), anaerobic digestion (6%), commercial solar (5%) and hydroelectric (1%).
He added: “We stay away from complex renewable energy projects, but things like rooftop solar are very straightforward and have the benefits of no moving parts, which can wear out over 20 years.”
