Global infrastructure manager Jim Lydotes outlines three US holdings that are more than they seem based on their sector classification. What looks traditional on the surface can have a very different story underneath, he argues.
With exposure to old age homes, renewables, technology and privatised public services such as water, Jim Lydotes, global infrastructure manager at Mellon1, part of BNY Mellon Investment Management, looks for the less obvious story behind the investment opportunities he sees. For example, with the growing trend of re-urbanising baby boomers, Lydotes is invested in players seeking to build new retirement homes in city centres.
Another example is industrials, a mainstay sector for infrastructure investors, with exposure to transport stocks, airports and projects such as toll roads. At around 20%, the industrials weighting within Lydotes’ global infrastructure strategy is almost half that of the S&P Global Infrastructure NR index and, within this, there is negligible exposure to the US. “All transportation infrastructure in the US is public, which makes it difficult to get things done when spending is allocated elsewhere,” he says. “It’s horribly inefficient.” When it comes to the US, many investors have been holding out hope for a promised increase in infrastructure spend, an initiative that is supported on both sides of the political spectrum. However, Lydotes thinks if such an allocation were to come, it is still years away. “While it has bipartisan support no one wants to give a win to the other side with the 2020 election looming,” he explains.
For examples of less conventional US ‘stories’ within his global infrastructure strategy, Lydotes highlights the following:
1) 5G but not as you know it
The global move to 5G is more than just the infrastructure or even the more obvious telecom and internet services, Lydotes points out. The whole ‘internet of things’ movement will rely on 5G networks. Already in Australia, telecom companies are connecting thousands of different devices a week and their 5G network has yet to be complete.
Highlighting some of the less obvious 5G uses, Lydotes points to offshore oil rigs and trucking. The former, he says, could potentially be run remotely, saving costs; while the latter could be run more efficiently, with a greater ability for fleet management and to track driving behaviours.
Lydotes is exposed to this ‘arms race’ for 5G. While he acknowledges Japan is likely to be the first country to roll out the latest advance in telecom services, as the country strives to prepare for the 2020 Olympics, Lydotes is really only exposed to US providers. In Japan there is a collaborative and sharing approach to the use of the fibre cable needed to achieve 5G, with the three main providers each using the others to achieve overall coverage. However, in the US there is a straight race to complete the infrastructure needed, with one of the main providers streaks ahead of the other, leaving a greater disparity between operators and a clear winner from an investment point of view, he notes.
2) Piping the energy
Another holding within the Infrastructure strategy Lydotes manages is listed as an energy stock but in reality is a provider of services to oil and gas companies operating in the Permian region (also called the West Texas Basin). The company owns and operates pipelines, some 20 natural gas processing plants and continues to develop its transportation services. As a midstream provider in the oil and gas value chain, the company has long-term contracts with oil companies as well as a tax shield that allows it to pay minimal tax over the next four years, he says. As such, the business supports a high payout ratio and dividend yield, Lydotes notes.
While the company appears as a traditional energy holding, Lydotes points out that, as the owner of the pipes rather than the producer of the oil, it is less exposed to the vagaries of the commodity’s price, getting paid regardless.
3) Going green for yield
In the US a new type of company has been created to participate in the surge of renewable energy projects. US utilities are carving out their existing renewable offshoots, creating new companies known as ‘yield cos’.
Lydotes notes US utilities are huge conglomerates, which have many arms, some of which have been focused on the construction of wind and solar farms. Separating these business from the main utility means the ‘yield cos’ operate as standalones but their income is still connected to the parent utility. Some of these renewable farm contracts, Lydotes says, can be as long as 20 years, enabling strong income payments.
Yield cos serve a similar purpose as a real estate investment trust, a structure many US utilities, for regulatory reasons, cannot use, Lydotes explains. “The practice only started a few years ago so the universe at the moment is somewhat limited,” he concludes.
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1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.