Ian Cowie: two investments trusts I am keeping an eye on

Our columnist considers the investment appeal of two trusts that invest in digital infrastructure - data centres, mobile phone masts and subsea cables. 

We might never know if it was a Russian submarine or a rusty trawler that cut the telecommunications subsea cable that connects the Shetland Islands to mainland Britain last month. But the incident - which is not the first of its kind - should serve to remind investors about the importance of what is sometimes called “the plumbing of the internet” or physical assets that make modern communications and commerce possible.

Two relatively new investment trusts - Cordiant Digital Infrastructure (LSE: CORD) and Digital 9 Infrastructure (LSE: DGI9) - offer shareholders access to above average income from this sector, with the potential for capital growth. Digital infrastructure - including data centres, mobile phone masts and subsea cables - is now the third biggest type of infrastructure capital investment, after energy and transport.

Despite the high profile of satellites, an estimated 97% of global internet traffic is still transmitted via fibre optic and other cables. Dr Michael Clare at the National Oceanography Centre put it pithily: “The cloud is under the sea, not in the sky.

But if these assets can be managed profitably, why aren’t digital giants - such as Apple (AAPL) or Microsoft (MSFT) - doing it for  themselves? Benn Mikula, fund manager of CORD, which was launched in February last year and has total assets of £826 million, told me: “They use third party digital infrastructure for two primary reasons: capital efficiency and operating efficiency.”

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He continued: “These firms do not have the balance sheets to do it all themselves, and their capital is invested more profitably in software and services than in this ‘plumbing’.

“Operating efficiency is a function of these assets being used more effectively when, for example, there are two or three tenants on a mobile tower.”

What’s in it for potential shareholders in these investment trusts? Thor Johnsen, one of the fund managers of DGI9, which was launched in March last year and has total assets of £917 million, said: “We have highly visible and contracted cash flow generation, 70% of which is inflation-protected

“The majority of recurring revenue over an average contract length of 7.7 years is Retail Prices Index (RPI) or Consumer Prices Index (CPI) linked with no cap.

“Crucially, we target a 10% total shareholder return and 6 pence dividend, which is cash covered by two times.”

Neither of these specialist investment trusts has much of a track record - and what there is has not been profitable. CORD has shrunk shareholders’ capital with a negative total ‘return’ of nearly 15% over the last year, according to independent statisticians Morningstar. Over the same one-year time period, DGI9 has lost 1.5%.

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That may explain why CORD shares trade at a 13.7% discount to net asset value (NAV), despite a dividend yield of 4.3%. Meanwhile, DGI9 yields nearly 6% income and trades at a 4.5% discount to NAV.

More encouragingly, although it is early days yet, both trusts have invested most of the funds they raised and their directors and fund managers have substantial ‘skin in the game’. CORD says they have £5 million invested in its own shares and “have been recent buyers”, while four directors of DGI9 declare five-figure shareholdings with Johnsen and another manager, Andre Karihaloo, also invested.

Perhaps surprisingly, there is also an environmental, social and governance (ESG) aspect to these funds. Johnsen explained: “The 9 in Digital 9 comes from the UN Sustainable Development Goal 9, which focuses on connectivity - or bridging the global digital divide – and on the decarbonisation of data centres.

“Only 10% of the data that sits in London, Frankfurt or Dublin data centres needs to be close to the user. The rest is latency insensitive and can be migrated to areas of abundant green power.

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“A fifth of Ireland’s power goes to data centres; that is unsustainable. Developers cannot build houses in West London because of the Slough data centre power demand; that is unsustainable.

“We are migrating data to the Nordics, freeing up power capacity in cities such as Dublin and London, reducing emissions by moving energy-intensive data sets away from net hydrocarbon economies to renewables surplus economies.”

At what point all that becomes profitable for shareholders remains to be seen. But there can be little doubt about rising demand for the infrastructure being funded, which is often a good starting point for long-term investors.

Ian Cowie is a shareholder in Apple (AAPL) as part of a globally-diversified portfolio of investment trusts and other shares.