Sequoia Economic Infrastructure Income Fund (LSE: SEQI) makes loans to infrastructure companies and projects in developed markets, generating what SIMCo head of portfolio management Steve Cook describes as a strong, steady income with a stable net asset value. Cook explained to Proactive’s Stephen Gunnion that because SEQI lends rather than owns, it avoids the full risks of equity investing, while infrastructure as an asset class has historically shown low correlation to broader markets and tends to outperform during periods of turbulence such as recessions or geopolitical shocks.
Cook highlighted Moody's data showing that credit losses in infrastructure are less than half those seen in comparable corporate lending over a long period of time. He contrasted this with general corporate credit markets - including high yield bonds and leveraged loans - where spreads are currently in the tenth percentile of all-time expensive levels, and some markets are in the first percentile, meaning they are more expensive than 99% of historical observations.
On the supply-demand dynamic, Cook argued that governments can no longer afford to fund the capital required for digitalisation, decarbonisation, data centres and demographic change, pushing more infrastructure financing into private markets where demand for capital significantly exceeds supply. As a result, SEQI is able to reject over 90% of potential investment opportunities and deploy capital selectively into what it considers the most attractive deals.
With the fund currently trading at a discount to net asset value and offering a dividend yield of more than 8%, Cook pointed to a trend of narrowing discounts across the sector, driven by additional capital entering the asset class and a diminishing number of income-generating funds as some alternatives go private or unwind. He says the current interest rate environment continues to support the fund's high dividend yield.
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