IFAM: Alex, you’re clearly very passionate about investing in global listed infrastructure. Can you explain to us why you think it presents such attractive opportunities and why you believe it should be on advisers’ and investors’ radar?
AA: Infrastructure as an asset class is well-established as a complement to multi-asset portfolios primarily in the private realm. We have observed huge amounts of private capital going into global infrastructure projects and assets over the years. These are investments being made by the likes of sovereign wealth funds, pension funds, endowments and insurance companies etc. where the investment focus is on meeting long term liabilities and with very long term investment horizons. One point of note is that the returns from this sector tend to complement and be generally uncorrelated to other investments held in their portfolios.
But private infrastructure investment tends to be for a privileged few. So in a sense, with the launch of our fund in 2017 we have democratised this asset class, providing access to it for investors in a liquid format by way of listed infrastructure businesses with many of the same types of characteristics underlying them as you see in the private realm. It is an asset class which is increasingly gaining acceptance within the investment community. Of course, managers will express their exposure to the asset class in different ways and I think it is important to have a number of different infrastructure strategies for advisers and investment managers to choose from. Like any investment strategy, there is differentiation here and it is important to understand this and to embrace it.
We ourselves aim to invest in businesses with real physical long life assets with reliable cashflow streams and growing dividends. The characteristics which come from these businesses and assets are incredibly complementary and attractive to investor portfolios.
One of the prime characteristics demonstrated by the asset class – and our strategy too – has been its ability to protect capital in more difficult market environments thereby protecting against downside risk. At the same time, because of the way we’re investing and what we’re investing in, we also have the opportunity to capture and participate in any upside when markets move higher. Because of this, I’m sure that advisers can see that we’re not just about offering a defensive strategy here and we are certainly not a bond proxy – which is something of a perception amongst the investment community when looking at this asset class.
IFAM: Infrastructure is a broad term for the investment opportunity set. How do you go about defining your investment universe?
AA: There are a number of different global listed infrastructure strategies operating across the UK investment market place. I believe that these strategies all offer something slightly different and I have the fullest respect for my peer group. Increasingly we are dealing with clients who will initially make a commitment to the sector within their portfolios and then will have exposure to more than one – maybe two or three – different strategies. These can work in a very complementary way. Our own starting point is the more traditional sphere of listed infrastructure, it’s what we call ‘economic’ or ‘core’ listed infrastructure. This relates to utilities, energy infrastructure and transportation infrastructure; but we have added two additional categories to the definition for our strategy to bring the asset class to the modern age.
The first of these additional categories is social infrastructure, which covers facilities required for the provision of health, education and civic services. This category of infrastructure offers similar defensive characteristics to the economic sphere albeit with a different asset base which provides diversification benefits.
The third category in which we invest and the most exciting from a growth perspective is what we call evolving infrastructure, which is built around the structural growth in areas such as communications. We all like to talk about this virtual world in which we live but we have to accept that there would be no internet or mobile communications without the distinct physical infrastructure which makes these modern marvels possible. Whether it is the mobile phone towers or data centres for example, it all matters. We take a broader approach to infrastructure and focus on seeking out growing income streams from the businesses we invest in. We are not just about delivering a high yield for investors though. As an integrated part of our investment process, we also apply an ESG (environment, social and governance) approach to ensure the sustainability of businesses and assets. In broad terms, that’s how I’d summarise the way we define our investment universe.
IFAM: When it comes to the M&G Global Listed Infrastructure fund, how do you and the team go about making asset allocation and stock selection decisions? What’s the investment strategy and process?
AA: We run a concentrated strategy, holding generally between 40 and 50 companies within the portfolio. This means that we have to know and understand these businesses intimately well. We take a bottom-up approach to selecting the businesses in which we invest and only select those with high quality, sustainable, long-life assets that have some form of strategic advantage. Very often there may be a physical barrier to entry which allows us to determine the confidence level in the cashflow stream that we will get from those businesses and the contracts that are behind those streams. We will look for growing dividends, so that we can deliver a growing income stream for our investors. On top of this, the ESG filter is integrated into the approach to ensure sustainability lies at the heart of what we do. We have to ask ourselves what we’re paying for that sustainability and those cashflow streams – so looking at valuations is a critical element. Next, we ensure that we are properly diversified across each of the broad categories of infrastructure in which we invest. There are sub-industries in each category so in total we actually have nine subcategories. Because we operate a global strategy, we are also diversifying regionally.
Interestingly, there are different types of dividend growth that we will get from different businesses. We will diversify across those types too. Some are rapidly growing – such as those in the evolving infrastructure space – others are more consistent but growing perhaps at a rate in line with inflation. Then from some we will get a GDP or GDP plus growth rate in the underlying income stream. We believe it’s important that we diversify across a number of different considerations which ultimately link in with those characteristics we talked about earlier, such as downside protection and the ability to participate in rising markets as well.
I should add just a word or two about liquidity. These are companies which are listed on mainstream exchanges throughout the world with full daily liquidity. Should it ever be needed, we could liquidate this fund completely to 100% cash and relatively easily within a matter of days. There are no privately held investments and no highly illiquid assets.
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