OBSR takes us behind its top infrastructure funds

Anthony McDonald, investment research analyst at OBSR, looks at the best performing funds in the infrastructure sector.

A country’s infrastructure plays a key role in the day-to-day lives of its citizens. We take the provision of water, electricity, gas, roads and other essential services for granted, but they are the backbone of every economy and their smooth running requires ongoing development, maintenance and management. Governments have historically shouldered these responsibilities, due mainly to the indispensable nature of infrastructure.

In developed markets, however, the trend over the past 20 years has been for increased collaboration with the private sector in providing key services, a move that many expect to accelerate as governments grapple with fiscal deficits. Australia and the UK were amongst the leaders in this development, which has included privatising existing assets, for example the UK  water industry in 1989, as well as using private companies to develop new services, such as the M6 toll road.

Meanwhile, key emerging markets have enjoyed a period of strong development and are wrestling with the infrastructure requirements of increasingly wealthy and urbanised populations. As a result, governments are investing heavily in the provision of basic services. This is exemplified by China’s massive city construction programme.

Diverse opportunity

These dual dynamics have created a growing, diverse investment opportunity in infrastructure over the past five to 10 years. The infrastructure private equity sector blossomed in the late 2000s, attracting significant institutional inflows from investors who were keen to benefit from the stable, predictable cashflows that can be gained from owning and operating infrastructure assets.

Meanwhile, the increasing involvement of the private sector in building, running and managing projects across the world has created an equity universe of companies involved in the sector.

Over recent years, a number of dedicated funds have launched to take advantage of this growing equity universe. However, investors should choose their investment carefully because the funds can have very different performance profiles depending upon their focus within the broad sector.

Monopolistic

At one end of the spectrum come funds which invest solely in companies that operate infrastructure assets. These typically have a focus on developed markets, which better fit their philosophical aim offering a stable, defensive investment with, typically, a high yield. Such a profile is the result of the monopolistic nature of most infrastructure provision – it is rare to have two separate railway networks or gas pipelines serving the same route.

The monopolistic characteristics mean the industries are usually stable in structure, while governments’ political need to ensure that essential services remain affordable mean that the operators are typically highly regulated. As a result, they tend to have highly predictable cashflows that make them defensive companies to own. In addition, the cashflows are typically linked to inflation, which can make the sector appear an attractive investment for those concerned about rising price levels.

Of course, there are clear differences within the universe; port and toll road volumes are far more sensitive to economic growth than domestic gas use and fund managers factor this into their stock analysis.

A rating

OBSR has researched these funds as they have developed and has awarded an A Rating to the First State Global Listed Infrastructure fund. It invests in companies that own and/or operate infrastructure assets, emphasising those active in the developing world and aiming to offer an attractive long-term total return in excess of its benchmark, the UBS Global Infrastructure & Utilities 50-50 index.

The
management team is led by Peter Meany, head of infrastructure at First State, who co-founded the group’s infrastructure business with Andrew Greenup, his assistant portfolio manager, in 2007. The duo have invested consistently in growing the team at the same time as delivering attractive performance relative to their objective.

Their disciplined process is underpinned by a strict valuation discipline, focusing on researching the companies in detail and seeking to identify relative value opportunities within the universe. Other funds with a similar approach to infrastructure are Partners Group Listed Investments – Listed Infrastructure and CF Macquarie Global Infrastructure Securities fund.

Other funds are designed with a different objective: to benefit from the development of new infrastructure across the world. This higher-growth approach would usually incorporate significant exposure to emerging markets. In keeping with their mandate, the funds have a far broader investment universe than those that invest solely in infrastructure operators. Companies benefiting from new projects operate in any number of industries, such as construction businesses and commodity producers.

Attractive performance

In OBSR’s rated universe, the JPMorgan Emerging Markets Infrastructure fund (A-rated) typifies this approach, investing across the energy, materials, capital goods, transport, real estate, telecoms and utilities sectors.

Managed by the highly experienced Richard Titherington, it aims to deliver attractive performance over the long term by investing in companies that are expected to benefit from infrastructure development. The team focuses on dividends and earnings growth in its quest to buy high-quality companies with attractive growth prospects.

Targeted offerings

Investors may also buy targeted regional offerings, such as the Invesco Asia Infrastructure fund, which seeks to identify companies with the potential to deliver unappreciated growth due to their involvement in the development of infrastructure in Asia.

The growing universe of private infrastructure-related companies can therefore offer interesting investment opportunities. However, investors must be mindful of the diverse nature of the sector, and ensure they select a fund that suits their investment premise and risk profile.