M&G’s new Global Listed Infrastructure fund launched in mid-October. Manager Alex Araujo, who is also co-deputy-manager on the group’s Global Dividend fund, explains why they want to bring a traditionally institutional asset class to a retail investor audience.
Why did M&G take the decision to launch an infrastructure fund?
We have always analysed and invested in infrastructure businesses as part of the Global Dividend Fund. This type of business has a number of appealing qualities and characteristics: They have enduring revenues, for example; they also have hard-to-replicate physical assets, which gives a barrier to entry; these businesses also have contracted, long-term cash flows. Their profile is stable, growing cash flow over time from an established asset base.
Also, they tend to be focused on services that are essential to every day life. This means that earnings tend to have less volatility than those of the broader market. There is inflation protection for investors through a growing dividend stream. We believe dividend growth is generally more important for investors than the absolute yield. Also, from an equity market perspective, these businesses tend to exhibit less share price volatility over time. All these qualities are attractive for investors in the current market environment.
How will the portfolio be structured?
We focus on three main areas. The bulk of the portfolio will be in traditional infrastructure assets. These are assets that provide critical and essential services to the global economy – water, power, transport. The second area, which comprises 10-20% of the portfolio is social infrastructure. This is projects such as schools, hospitals or prisons. We will then have 15-20% in ‘evolving’ infrastructure.
Each of these areas have different characteristics. For example, social infrastructure tends to provide stability and defensiveness, but with lower growth. We have broadened the definition of infrastructure to bring it in line with modern reality, represented by the ‘evolving’ section of the portfolio. That means the portfolio will include data centres, fibre optics lines or mobile phone towers. These are all areas of structural growth. We believe this will give the portfolio greater balance and diversification alongside the more traditional utility-like infrastructure assets.
The fund will be relatively concentrated – at 40-50 names. We also have a watch list of names that we want to buy at the right price.
How are you benchmarking performance?
Many infrastructure funds tend to benchmark themselves against infrastructure indices. We believe there is no perfect infrastructure index. They tend to be over-concentrated in one or more areas, and can leave investors over-exposed to certain sectors, such as utilities, for example. They also tend to miss out on new and evolving infrastructure development. There is a huge amount of investment going into this area and new opportunities are emerging all the time. That is why we’re truly active and will use the MSCI World index as a comparator.
What are the key criteria for inclusion in the fund?
The characteristics of infrastructure businesses vary across jurisdictions. These tend to be regulated businesses and often operate in very different regulatory environments. We have spent two years building our investment universe and it is now 280 companies. To qualify, companies must meet certain strict criteria, designed to assess the sustainability of the business. We are not focused primarily on the yield premium to the market, but more on the sustainability of that income and its growth.
In selecting companies, we will draw both on our own experience and on the private assets infrastructure business within M&G. They have lengthy experience of infrastructure transactions, and have a good understanding of transaction values. This is still an area where many transactions happen in the private realm and therefore their experience is invaluable for us.
What is the geographic split of the fund? Will you be taking exposure to infrastructure assets in emerging markets, for example?
To our mind, the developed world tends to be a better place for infrastructure businesses. There are some opportunities in emerging markets and we will have them in the fund, but the bulk of the listed infrastructure assets are in the North America and therefore the fund will have around 50% of its exposure there. It will also have significant exposure to the UK and Mainland Europe. It will be around 90% developed and 10% emerging. That emerging portion will also include Hong Kong and Singapore.
Our geographic positioning will be dependent on valuation and circumstances. We will take advantage of volatility, shifts in valuation or a changing regulatory environment to move funds out of one area and into another.
Is there a danger that infrastructure assets are less favoured in a climate of rising rates?
We have done a huge amount of work back-testing our investment universe. We have businesses that pay dividends and, as such, they are geared into the interest rate cycle. However, our stress-testing suggests that while there can be short-term shocks – particularly in businesses structured as Reits – the impact is positive in the longer term. Investors need to think about why interest rates are rising: An interest rate rise is associated with growth and inflation, which is often good for these types of businesses. These companies have assets with long lives. As the yield curve shifts, they start to deliver positive performance.
Why now for infrastructure assets?
We are in a lower return world, with interest rates likely to remain structurally low. Infrastructure assets can bring yield enhancement with lower volatility, and diversification from the broader equity market. To some extent this asset class sits between equity and fixed income.
Also, at the moment, there are not many funds in the retail space. We are doing a lot of education as part of the fund launch. We believe we are doing something very different and ‘democratising’ an asset class that has traditionally been the preserve of institutional investors.