Peter Meany, manager of First State Global Infrastructure.
Global infrastructure is a relatively unexplored area for most investors, but one that could provide an excellent diversification tool. Here, Peter Meany, the manager of Elite Rated First State Global Infrastructure fund since its inception in 2007, talks us through their investment ideas and outlook for the area.
What are infrastructure investments?
The infrastructure of a country is vitally important to the economy. It covers things such as transport (roads, rail, ports and airports), utilities (water, gas and electricity), energy (oil, gas pipelines and storage) and communications (telecom towers and satellites).
Most infrastructure assets can increase prices with inflation, due to concession agreements, regulatory regimes and/or limited competition – the Dartford Toll, for example. This means it provides inflation-protected income as well as strong capital growth opportunities.
Tell us about the fund
The fund aims to select investments that will provide income and inflation protection for investors. Around half of the fund is invested in defensive income holdings and the other half in growth holdings.
When we are researching companies we look for a number of qualities including; barriers to entry – monopoly services providing essential services; pricing power (for inflation protection and recovery of uncontrollable costs); sound management, with a responsible approach to stakeholders, and where growth is less dependent on the economic cycle.
How is it currently positioned?
At the moment we are tilted more towards the growth portion – positioned for improving economic conditions and rising interest rates in the US. Consequently, we are underweight US regulated utilities due to their sensitivity to interest rate and bond yield rises. Instead, we are finding opportunities in freight rail in both the US and Canada.
We are overweight toll roads in Europe, but particularly concerned about energy in Germany – believe it or not, blackouts are expected in the next five years due to nuclear power stations shutting and an over-reliance on renewables. There is also continued risk of political uncertainty in Spain and interference from the socialist government in France.
In the UK, the general election was of concern, but a Conservative government has now made the UK energy sector an attractive proposition again.
Valuations of emerging market infrastructure companies look relatively attractive but we've had mixed results. We have holdings in Brazil which have been hit by interventionist politics and regulation issues. However, the legacy from the 2014 football World Cup and the upcoming 2016 Olympic Games should create more movement in the toll roads and utilities sectors, where the fund is invested. China has shown better results, with a strong start to 2015, particularly in ports and toll roads which have had good earnings growth.
What do you think about renewables?
Five years ago we dismissed renewables as they were not profitable and required large subsidies, which were under threat from debt-laden governments. However, recent advances in technology, particularly in power storage, have made the industry more attractive. Wind farms can now compete with traditional power stations without subsidies. Solar energy is now only a few years away from profitability and their own dependency on government subsidies is rapidly diminishing.
The benchmark for the funds has changed – why is that?
The old index ceased to exist, so the industry got together and created the FTSE Global Core Infrastructure 50/50 index. We think it is much more reflective of the sector and we like the reduction in the previously heavy Japan influence. We were never comfortable with the 15% weighting to Japanese companies. It has been further enhanced by fewer integrated utilities and the addition of US freight rail.
The First State Global Infrastructure fund has a highly skilled management team in a niche area of investing with a strong growth possibility. It offers an alternative way to find an attractive yield with global exposure, but with an element of income protection built in. The fund offers an interesting diversification opportunity for those with larger portfolios looking for an alternative income source.
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Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Peter's views are his own and do not constitute financial advice. The positioning of the fund was correct as at 28th April 2015.