Fund in focus: First State Global Listed Infrastructure
Posted by Liz Rees in Fund and industry updates category on 10 Oct 19
The fund’s objective is to provide income and growth by investing in infrastructure opportunities.
The aim is to deliver positive returns in all environments, although this is subject to short-term fluctuations in the stock market. Although clearly these cannot be guaranteed, the managers target a yield of 3-5% and a total return of around 10% per annum, over a market cycle of 5-7 years.
This fund invests mainly in companies, listed in developed markets, which are involved in infrastructure projects worldwide. The focus is on energy, communications and transport. These sectors tend to be defensive and have reliable income generating characteristics.
The team, based in Sydney, is led by Peter Meany. He joined First State in 2007 as Head of Global Infrastructure Securities. Meany and his co-manager, Andrew Greenup, developed and implemented the strategy for the launch of the fund in 2007.
Meany has built a well-regarded operation, with 4 additional investment managers and 3 analysts each having a specialisation in infrastructure sub-sectors. However, they all get involved in debating and challenging investment ideas.
Investment philosophy & process
The managers invest in companies where they believe the true worth is not reflected in current price. They believe the best opportunities lie with businesses that provide essential services and can raise prices without a drop in demand.
The rigorous stock selection process is designed to evaluate companies and determine an appropriate entry price. There is an emphasis on quality attributes, including high barriers to entry, pricing power, healthy financial positions and adept management.
A comprehensive 25-point quality assessment is undertaken along with consideration of geopolitical and macroeconomic risks. The valuation and quality rankings are factored into stock selection. Most research is conducted in house and the team builds close relationships with its investments.
This approach provides clear buy signals and sell disciplines. The highest conviction ideas will have an initial 4% holding, with other positive recommendations starting at 2%. While individual companies are selected on merit, exposure at sector and regional levels is carefully monitored to manage risk.
Environmental, Social and Governance (ESG) is also important as infrastructure businesses carry responsibilities to local communities in which they operate. ESG scores are incorporated in the quality assessment which accounts for 20% of the overall stock ranking. A dedicated team supports the investment managers with relevant ESG research plus advice on technical issues.
Environmental considerations are particularly important for electric utilities, energy infrastructure (oil & gas pipelines & storage) and railways. The preference for companies in developed markets is due to superior governance, with emerging markets exposure capped at 20%.
Performance & costs
The fund is actively managed and is unconstrained by a benchmark. From 01/04/2015 to 30/09/2019 the fund’s return was 13% annualized compared with 13.4% for the FTSE Global Core Infrastructure 50/50 index and 6% for the IA Global sector*.
Since launch on 09/10/2007, with Peter Meany at the helm, the fund has delivered a total return of 10.7% annualized compared with 7.0% for the IA Global sector* (the FTSE Global Core Infrastructure benchmark was not available before 2015).
The current ongoing charges figure (OCF) of 0.78% is below the peer group average in the IA global sector. Transaction costs are reasonable and First State absorbs costs associated with research.
The portfolio is concentrated with 47 holdings at present. The top three positions each account for around 5% of the portfolio. Around half the portfolio is in the US followed by Canada, Japan, Australia, the UK, Spain and China.
The fund invests in a broad range of listed infrastructure assets including toll roads, airports, ports, railroads, utilities, pipelines, and wireless towers. Toll roads is the biggest sector overweight and the fund is also overweight in energy pipeline companies.
There is low exposure to electric utilities as many US companies trade on expensive valuations. The fund is also underweight airports, with exposure limited to European and Mexican operators. This sector faces medium-term headwinds following a long period of above-average growth.
NextEra Energy, a US renewable energy operator based in Florida, is currently the largest holding. This company has an ambitious plan to install 30 million solar panels by 2030. Solar power is now the lowest cost electricity in many parts of the world.
The second biggest holding is currently Dominion Energy, based in Virginia, a supplier of electricity and natural gas. The company aims to build 3,000 megawatts worth of new solar and wind energy by 2022. A new state law has encouraged investment in renewable energy, smart grid technology and energy efficiency programs.
Transurban Group, an Australian toll road company, is currently the 3rd largest position. Toll roads offer good protection against inflation as barriers to entry are high. The company is able to increase prices by the greater of inflation or 4% pa.
Infrastructure tends to be less affected by slowing economic growth due to the essential nature of services such as transport, electricity and water.
Global demand for infrastructure assets is driven by globalisation of trade, urbanisation, climate change and the digital revolution. The United Nations estimates that 70% of the world's population will live in cities by 2050, requiring passenger railways, toll roads and essential utilities.
The integration of emerging markets into the global economy requires major infrastructure developments such as China’s Belt and Road Initiative. Furthermore, existing facilities are in need of repair and restoration. Investment has fallen behind in developed countries but significant capital programmes are planned to replace ageing infrastructure and support economic growth.
High growth areas include cell phone towers, road networks and upgraded electric grids. Many listed companies have strong financial positions with scope for acquisitions to boost earnings and dividends.
Nevertheless, infrastructure investment is not without risks. Increasing nationalism could reduce the value of certain infrastructure assets that support global trade, such as ports, freight railways and toll roads.
The defensive nature of the strategy, and emphasis on capital protection, may help smooth long-term returns. However, in the short term, listed infrastructure has tended to correlate with broader equity markets.
The sector currently provides an attractive level of income, relative to bonds, as well as an inflation hedge. Furthermore, the fund has demonstrated its ability to achieve strong capital growth as well. Of course, past performance is not a guide to the future.
There are specific risks associated with infrastructure, including natural disasters, terrorism, operational disruption, and national and local environmental laws. Projects sometimes take on high levels of debt so could be negatively affected if interest rates rise. Finally, they can also be affected by political policies.
The fund is best considered as part of a diversified portfolio. As it invests in assets denominated in overseas currencies, exchange rate movements will affect the value of the investment.
Nevertheless, we believe this fund is worthy of consideration for anyone with a long-term horizon, seeking income and diversification. Morningstar award it a bronze rating.
* Source: FE analytics, total return in pound sterling
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.