First State - the case for global infrastructure

Kate Marshall | Tue 21 November 2017

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• Infrastructure assets have been popular with income investors for several years
• Companies in the sector are often able to increase their dividends in line with inflation
• The manager is optimistic about the increasing number of infrastructure investment opportunities

Our view

First State Global Listed Infrastructure is our favoured choice for investors who seek exposure to the infrastructure sector.

Peter Meany, the fund’s manager, is supported by an experienced team at First State and we believe they have a sensible and robust investment process in place. The fund is run in a conservative fashion, with a focus on cash-generative companies with predictable earnings and low levels of debt. We therefore expect the fund to offer an element of shelter when global stock markets are weak, but lag a rapidly-rising market.

These types of company have the potential to pay an attractive income, although the manager aims to grow both the fund’s income and capital over the long term. This means he’ll also invest in lower-yielding companies with the potential to grow their income over time. The fund currently yields 2.7%, although this is not a reliable indicator of future income. The fund maintains its place on the Wealth 150 list of our favourite funds across the major sectors.

What has helped the performance of the infrastructure sector?

Interest rates have been at rock bottom levels for more than a decade. Many income-seeking investors have therefore favoured the regular dividends paid by companies that own or operate infrastructure assets. This includes companies that run toll roads, railways or airports, or those that supply utilities such as water or power.

These companies provide essential services so they can raise prices, often in line with inflation, without seeing a drop in demand. They also benefit from barriers to entry from competition. For instance, the expense of setting up and building new infrastructure makes it difficult for new competitors to enter the market. The regular cash flows received by existing companies can be enjoyed for many years and shared with shareholders.

It’s easy to see why this type of company has been popular with income investors, and their share prices have benefited. But after several years of low interest rates, some investors question what will happen in a rising rate environment.

According to Peter Meany, if interest rates rise to counteract rising inflation (an action often taken by central banks), the effect on infrastructure assets should be limited due to the inflation protection they typically offer.

If rates rise for another reason, the manager aims to offset this through careful stock-picking and by avoiding companies he believes could suffer the most in this environment. That said, if rates rise quickly or unexpectedly, this could impact infrastructure assets across the board.

Our analysis suggests the manager has a good stock-picking record, although this is not a guide to how the fund will perform in future and it will still be susceptible to economic, political and regulatory risks. Over the past ten years the fund has grown 167.4%* compared with 99.9% for the IA Global sector.

Past performance is not a guide to future returns. Source: Lipper IM *31/10/2017

Where does the fund currently invest?

The fund currently has a bias to the toll roads sector, where Peter Meany has found a number of high-quality companies with attractive yields and pricing linked to inflation. Over the long term these companies could benefit from the increased use of toll roads, as a result of urbanisation and increased traffic congestion.

The manager also favours railroad companies, such as Japanese firms East Japan Railway and Central Japan Railway. He also invests in a number of US freight rail operators: Norfolk Southern is a recent addition to the portfolio. He believes these companies benefit from pricing power and have the ability to grow earnings by running their businesses in a more efficient manner.

Overall the fund is a relatively concentrated portfolio, which can increase risk compared with a fund invested across a greater number of sectors and companies. It has the flexibility to invest in smaller companies and emerging markets, which can also increase risk, although the fund currently has little invested in these areas.

Increasing investment opportunities

Peter Meany is optimistic about the increasing number of investment opportunities in the sector. For example, some companies are selling off parts of their business to streamline their remaining activities and make them more profitable or efficient. These new businesses are often more valuable and make attractive investments.

The privatisation of infrastructure assets in some countries, in which government-owned assets are sold to private investors, also provides new opportunities. The Brazilian government, for example, is due to auction over 30 infrastructure assets in 2018. This includes 14 airports, 15 port terminals and 2 toll roads.

Please note the fund’s charges are taken from capital, which can boost the yield, but reduce the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/ key investor information document in addition to the information above.