Redpoint Investment Management Senior Portfolio Manager, Ganesh Suntharam and Jason Hazell, Head of Investment Communications, NAB Asset Management discuss the opportunities in global infrastructure stocks and how investors can expect GDP-like returns with less risk.
Jason Hazell: Hello I’m joined today by Ganesh Suntharam to talk about infrastructure and investing. Welcome, Ganesh.
Ganesh Suntharam: Thank you Jason.
Jason Hazell: Why do you think investors should have an exposure to infrastructure in their portfolios?
Ganesh Suntharam: So a portfolio of good quality infrastructure assets is an important asset location decision for investors. What that portfolio provides is exposure to individual securities that are very important to their local economies. And at an overall portfolio level, what the investor gets from having that exposure is a GDP like growth characteristic, related to the success of the local economies that each of these assets operates in.
And that growth, that GDP style growth is important from an asset allocation perspective, because particularly in a low interest rate environment, your alternatives in terms of cash are not yielding as much as you would like. And in many ways, you’re not maintaining the purchasing power of that wealth that you have created. So what an infrastructure portfolio allows you to do is tap into that global growth, associated with these good quality companies and generate yield, in a slightly more defensive portfolio, relative to the broader global equities.
Jason Hazell: Would you mind giving us a couple of examples of types of assets that you’ve owned for the last few years?
Ganesh Suntharam: Some of the assets that we’ve owned over the last few years that have done quite well for us, are things like American Water (NYSE:AWK) and West Japan Railways (TYO:9021). The water market in the US is very interesting; it’s a fragmented market. It’s not as mature as the electrics and the gas utility market that you have. So what that means from an investor’s perspective is that there is greater opportunity. And for companies that are able to tap into these assets, which are currently primarily municipality owned, and provide CAPEX to reinvigorate those assets, they provide a longer return over the long run.
So that whole segment in terms of water utilities has been an important investment for us. In terms of West Japan Railways, that’s a very stable asset with a large footprint within Japan. It generates great cash flows off the back of its commuter transport business. And like many airports around the world, it’s slowly commercialising the space that it has, in the assets that it owns. So for us, both of those two assets have done well in terms of their performance in our portfolio, over the last five years.
Jason Hazell: They’re quite different assets right, both geographically and sector. So how do you go about building a portfolio with those much different assets in mind?
Ganesh Suntharam: That’s a great question, because the first thing we think about is not the individual asset itself. The first thing we actually think about is what’s the balance in the portfolio. And the way we look at balancing the portfolio is we look at our market, our investable opportunity set and we say, what sectors do we want exposure to? And here we look at six sectors primarily. So we look at utilities in the form of both electric and non-electric, whether non-electric is composed of the gas, the multi and the water. We look at transport; we look at transport in terms of rail and non-rail, where the non-rail is made up of your ports, your airports and your toll roads.
And then we look at networks, which are made up of your pipelines and then on the telco side of network, we look at both the mobile towers and so like communications. Now that’s six broad groupings and what we like to get is a good balance in that grouping. Because what that balance creates is first an exposure to all different types of infrastructure, so it’s not overly concentrated. And that diversification then helps you, in terms of navigating through some of the performance speed bumps, that a more concentrated portfolio might generate.
So for us that balance is the first part of our investment process. And then the second part is then the asset itself. So in terms of the asset itself, the first part of that is how good is this asset in terms of its quality? These are long dated assets, so what we’re looking for is quality that measures the long dated nature of it. And here we look at things like the governance practices of a company; we need to make sure that they’re sound. We want to make sure that the environmental practices and the social practices of a company are good. And we want to make sure that the balance sheet is healthy, so what’s leverage like and those types of characteristics.
Once you identify that good quality company, you then want to look at - well whatevaluations look like. What’s the growth outlook for that company look like? And how much cash flow is it generating, relative to the CAPEX that it needs to put back into that business. So we continuously monitor many different characteristics about the infrastructure assets that we own. Making sure that we’re selecting the best group of securities, within each of those six sectors that we want to build a good balance within.
Jason Hazell: Great, well many thanks for your time Ganesh.
Ganesh Suntharam: Thank you Jason.