First State Global Listed Infrastructure – more value in medium-sized companies?

Dominic Rowles | Tue 10 December 2019

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• The managers think many large infrastructure companies have become too popular with investors
• They've invested more in medium-sized businesses, which they think are better value
• The US remains a large part of the fund and the managers think it’s home to many high-quality infrastructure companies

Our view

From the roads we drive on to the energy that powers our homes, we all rely on the infrastructure sector. The First State Global Listed Infrastructure fund invests in companies across the globe that run or own infrastructure assets, such as toll roads, airports and utility suppliers. As the global population grows, demand for these things is expected to rise rapidly.

Managers Peter Meany and Andrew Greenup look for companies they think can grow steadily with unique positions in their market that make them difficult to compete with. They tend to invest in a fairly small number of companies and have the ability to invest in emerging markets. These factors, combined with the fund's focus on one sector, add risk.

Some infrastructure funds invest directly in infrastructure assets which can be illiquid (tough to buy and sell). But this fund only invests in infrastructure-related companies which are listed on the stock market, meaning there is much more liquidity.

We think the managers are supported by a strong team and like their sensible approach to investing. They’ve done a good job for investors over the long term and we expect that to continue, though nothing’s guaranteed. This is our preferred option for investing in the infrastructure sector. It's not on the Wealth 50 though because it's fairly specialist and there are other global funds that invest more broadly at lower prices.

What changes have been made?

With interest rates on cash at extremely low levels, people have been forced to look further afield for returns. Many have chosen to invest in large infrastructure companies because of their relatively high, and often inflation linked, dividends. It should be noted that unlike interest on cash, dividends are variable and not guaranteed.

The managers think the popularity of these companies has pushed many of their share prices too high. They've therefore invested more in medium-sized businesses, where they think there's more value.

Around half of the fund is invested in the US, a country they think is full of high quality infrastructure businesses. Recent investments include Avangrid, the third largest wind power operator in the US. The managers think it has the potential to grow earnings strongly in the coming years despite recent share price weakness.

In contrast, an investment in Australian railroads business Aurizon was sold following a period of strong performance.

How's the fund performed?

The fund's done well over the long run. An investment of £10,000 made at launch in October 2007 would be worth £32,045*, although past performance is not a guide to the future.

More recent performance has been volatile. 2018 was a challenging year both for the fund and the broader global infrastructure sector. Some investors worried that interest rates would start to rise, causing investors to take their money out of infrastructure companies to hold more cash.

The fund also faced a small number of company-specific issues including CCR, a Brazilian transport company which faced a corruption scandal. The share price fell sharply but the managers felt it went too low, given the management team involved in the scandal had already departed the business. The managers added to their investment at a lower share price.

2019 has been a much better year so far. Fears about rising interest rates subsided and many of 2018's weaker performers did better. CCR, for instance, was one of the fund's top performers over the period.

Past performance is not a guide to the future. Source: Lipper IM* to 30/11/2019.

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