QUESTOR: HSBC Infrastructure is a solid dividend play

But look East for the biggest returns.

HSBC Infrastructure Company

109½p -1¼p

Questor says BUY

Today's investment is all about cash flows and yields. HSBC's Infrastructure Fund (code HICL) is a closed-end investment company that invests in infrastructure assets – primarily in the UK, but the group is now looking for opportunities abroad.

The fund buys Private Finance Initiative (PFI) and Public Private Partnership (PPP) assets post-construction, with the intention of holding the assets for the long term and generating solid cash flows from their investment.

The strategy is fairly conservative for two reasons. The company does not get involved to any great extent with projects at the construction stage, which can be high risk or high return. It also does not invest in "economically sensitive" infrastructure such as toll roads, ports and bridges, where income is not predictable and depends on the prevailing economic conditions.

Investment advisers are not passive. They sit on the board of each of the PFI/PPP projects in which the fund is invested. A list of all 28 projects the fund is invested in is provided in the accompanying graphic.

Because of the nature of its investments, the fund had good, reliable cash flow for many years. Few investments in the current climate have such good visibility.

In the year to March 31, the company paid a total dividend of 6.4p. At today's price, the shares are therefore trading on an historic yield of 5.7pc, which is well worth having. It also looks particularly safe as the company's cash flow from operations was £23.4m, which covers the payout by 1.26 times.

The group posted a loss over the year of £22m. This was caused by a £42.4m capital loss resulting from lower valuations within the portfolio. This is not surprising in the current environment for property. However, it is the cash that we are interested in. The net asset value per share at the end of the period – calculated after dividend payments have been deducted – was 107.2p a share.

Ultimately, the fall in property valuations is likely to be positive for the fund, as new assets will be able to be purchased at more realistic prices. There are also likely to be distressed sellers around in the coming year.

These sort of investments do better in an inflationary environment, as rental payments are tied to the retail price index. That's the reason for recent under-performance as the market expects deflationary pressures to persist. However, Questor notes that a long-term opportunity to buy an income-producing asset at a reasonable price has been created.

Of course, with the UK government getting into a staggering amount of debt, the pipeline of PPP/PFI projects for the fund to buy in the secondary market may fall. This is why the fund is looking to investments foreign in markets where public-private initiatives are at a less developed stage than in the UK.

The group is currently targeting assets in Europe, North America and Australia. The company is also looking at investing in renewable energy projects, providing appropriate contracts for secure and guaranteed earnings are in place.

The fund is also looking to invest in utility assets, something it has not done before because of the valuation. It will also selectively debt fund projects, as has been done with Kemble Water, where it has participation of £30m in the Junior Term Loan Facility.

Questor advises investors seeking an income stream with the potential for capital appreciation over the longer term to buy the fund. More information on the investments and the investment managers can be found at www.hicl.hsbc.com

Templeton Emerging Markets

374½ -4½p

Questor says BUY

According to the Centre for Economics and Business Research (CEBR), the Western world will generate less than 50pc of global GDP this year because of the recession. This will be the first time this has happened in well over a century and the CEBR's previous prediction for this event was 2015.

This means that the downturn has shifted the balance of economic power to the East six years early.

The share of world GDP from the US, Canada and Europe is now forecast to fall from 60pc–64pc, where it fluctuated from 1995 to 2004, to 49.4pc in 2009 in dollar terms. The Western world's share of global GDP is forecast to drop to 45pc by 2012.

The report also showed that world GDP dropped by 1.4pc in 2009, the first decline since 1946. World growth is forecast to bounce back in the second half of 2009 but to moderate in 2010 as fiscal retrenchment and the impact of structural deleveraging hold back the global recovery.

"We had expected this to happen, but not quite so soon. The West will have to start to get to grips with the fact that we are no longer dominant and cannot expect to have things our own way," said Douglas McWilliams, CEBR's chief executive.

The Templeton Emerging Markets fund's three largest shareholdings are in Brazilian companies: banking group Unibanco, at 6pc; metals and mining group Vale, at 5.4pc; and discount bank Banco Bradesco, at 4.9pc.

Questor first recommended shares in Templeton at 284p on January 5. It is a tip of the year. Despite the fact that the shares are up 32pc since their recommendation, they remain a buy at current levels and Questor regards it as a core holding.