First State Global Listed Infrastructure Fund - research update
Heather Ferguson | Mon 07 November 2016
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Against a backdrop of low interest rates and bond yields, demand for income-generating investments remains high. This has led Peter Meany and Andrew Greenup to feel positive in their outlook for global listed infrastructure.
Within their First State Global Listed Infrastructure Fund, they invest in a wide range of businesses, including those operating toll roads, airports, ports, railroads, utilities, pipelines, energy storage, mobile towers and satellites. These sectors all benefit from high barriers to entry - it is not easy to build a new airport to rival Heathrow or an alternative to the Dartford Crossing - and although prices are regulated, tariffs and charges often rise in line with inflation.
The managers are currently positive on toll road operators, where they feel investors have overlooked the potential for these companies to grow earnings through toll rises and increased traffic volumes. They also favour mobile tower operators. These businesses tend to have long-term contracts with telecoms providers and ongoing growth in mobile data use should support earnings.
Utilities companies account for around 40% of the fund. Investments in this area are focused on businesses at the forefront of renewable energy development, such as NextEra Energy and Xcel Energy, which are benefiting from falling costs, improving productivity and growing market share. They have also invested in companies such as Eversource Energy and Dominion Resources that are building the infrastructure required to move energy from the place it is generated to the homes and businesses that use it.
In the UK, the managers have invested in United Utilities. Although many investors view the regulator’s control over the firm as a negative, Peter Meany and Andrew Greenup like the predictability their involvement brings. The company’s allowed earnings are set by OFWAT over five year periods and are linked to inflation, which provides investors with steadier and more dependable returns. In the US, however, the managers feel the regulators have created a challenging environment for the industry. US utilities that derive a significant portion of their revenues from conventional energy generation are also faced with declining market share and rising costs.
The fund has performed well over the past five years as investor demand for defensive, income-paying investments has boosted share prices in this sector, although please remember past performance should not be taken as an indicator of future returns. Recent positive performance has been aided by the fund’s utilities investments and exposure to Latin American infrastructure. Mexican airport operator GAP and Brazilian toll operator CCR have both benefitted from growth in passenger and traffic volume, for example.
Our View
The fund has provided an element of shelter during times of falling prices due to the ‘steady’ characteristics of investing in infrastructure (such as reliable cash flows, inflation protection and the necessity of their services). The fund’s historic yield is 2.7% (although, this is not guaranteed to continue into the future), which in a low growth, low interest rate environment is attractive to investors able to accept the risks. Please note the fund’s charges can be taken from capital which can increase the yield but reduces the potential for capital growth. The fund is concentrated and exposed to smaller companies, which is a higher-risk approach.
Peter Meany has over a decade's experience as an infrastructure and utilities analyst, and has managed the fund since launch in October 2007. Alongside Andrew Greenup, he is supported by a well-resourced and experienced team at First State. We believe the fund makes an excellent choice to diversify a portfolio and it remains on the Wealth 150 list of our favourite funds across the major sectors.
Find out more about this fund including how to invest
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