Argo Global Listed Infrastructure (ASX:ALI) 1H18 results & outlook


by Rachael Jones

Argo Investments Limited (ASX:ARG) Managing Director Jason Beddow discusses Argo Global Listed Infrastructure Limited (ASX:ALI), its investment performance, portfolio composition and benefits for investors.

Rachael Jones: Hello. I'm Rachel Jones with the Finance News Network. Joining me today from Argo Global Listed Infrastructure is Argo Investments' Managing Director, Jason Beddow. Jason, welcome to FNN.

Jason Beddow: Hi, Rachael. Thanks for having us here.

Rachael Jones: First off, could you start with an introduction to your company?

Jason Beddow: AGLI, as we prefer to call it because Argo Global Listed Infrastructure (ASX:ALI) is quite a mouthful, is a relatively new company. We brought it to market in 2015, really to provide an opportunity to Australian retail investors particularly, to get exposure to what is a niche asset class. We raised about $280 million. The current NTA's about $2.04. The company's profitable and paying dividends.

We partnered with a global specialist manager, Cohen & Steers. They're based in New York and they run the portfolio for us.

Rachael Jones: And now to your first half 2018 results, what were your highlights?

Jason Beddow: The first half '18 was quite good, so the profits increased, we were able to increase the dividends to shareholders. In a relative sense, the portfolio manager outperformed I guess our benchmark, which investors are always looking for. And yeah, the company has no debt and so we think things are solid. Infrastructure itself has probably been a laggard as a sector, when you've had a very high returns from growth stocks and tech stocks in particular, but we still think the diversification it will offer to shareholders over the long term is good.

Rachael Jones: And now to the LIC in more detail, what can you tell me about the portfolio composition?

Jason Beddow: Sure, so the portfolio is currently about 60 holdings, out of a universe I guess of about 350 to 400, and in a market size that's probably twice that of the Aussie market. There's three Australian stocks, Australia is included in the universe. We have APA Group (ASX:APA), Spark (ASX:SPK), and Transurban (ASX:TCL), though it's less than about 4 per cent of the portfolio.

16 countries are represented and spread across I guess all the subsectors of infrastructure as we would call them. Utilities, transport, electrical, and distribution. Nextier Energy is AGLI's biggest holding, and that's an integrated energy producer based in the US. It's also the largest wind and solar producer in the US. That's about five and a half percent of the portfolio.And these are big companies, so that's about the same market cap as CSL (ASX:CSL), for example.

Union Pacific is another big holding which is quite a well-known name, and the other thematic we like is the telecommunications I guess infrastructure. So wireless towers, so Crown Castle is another large company, large holding, and really is leveraged to the increasing data usage going on around the world.

Rachael Jones: And what can you tell me about the characteristics?

Jason Beddow: Look, it's a total return story, I guess we would say. Global infrastructure has a lot of reinvestment opportunities, so from an Australian investor perspective, they do yield lower than what I guess retail investors traditionally would expect from infrastructure here, because they have a lot of reinvestment they're doing, so it's slightly lower. But the opportunities for these companies to grow and invest offshore over a 10-20 year time horizon are quite large. It's really a long term story. I mean, these assets are built to last for 30-50 years.

Rachael Jones: And your key metrics?

Jason Beddow: We think as a total return proposition for investors, that there'll be some capital growth, and a growing dividend stream. I guess what we like about it or what we think is attractive is the diversification, so it has a very low correlation to Australian equities and general equities, so that will give some downside protection I guess we would call it, as a fairly defensive asset class.

So, in the good times, infrastructure's not likely to perform as well as the FANG stocks for example, or others, but in times of more volatility that we've recently seen, this investment class behaves very well, and the cash flows are very sticky from these assets.

Rachael Jones: And Jason, now to a more general question, what is the outlook for global infrastructure assets, and what impact can higher interest rates have?

Jason Beddow: Sure. If I touch on higher interest rates first, I mean, they impact infrastructure stocks in two ways. There's the cash flow impact of higher debt burden, and then there's the I guess read through of higher risk free rates into how these assets are valued. A lot of infrastructure has quite a lot of leverage to a strong economy, and growing inflation. Airports, toll roads, often they have inflation linkages.

In a rising interest rate environment, they actually should grow earnings, have good leverage, and have increased values. The flip side of that is your regulated utilities. They don't have a lot of flexible in the business model. The gas and energy, sorry, electricity usage will stay fairly constant. They may have a higher debt bill, so it's really that heavily regulated part of infrastructure that may I guess underperform or not do so well in that environment.

Generally we think the outlook for infrastructure's very positive. Requirements from the developed world, with rundown infrastructure, urbanisation of emerging markets. I mean, some of these statistics that are thrown around by experts, multiple trillions of dollars that need to be spent around the world. Throw on top of that, the move to renewable energy that is happening globally, what needs to be built, and also governments are using this as a, I guess, physical stimulus.

To stimulate the economy, we're seeing what's happening in New South Wales and the impact it's got there. Look, time will only tell if Donald Trump and the US follow through with their high I guess, what they said they're going to do with infrastructure, but globally, we think the longer term thematics are very solid.

Rachael Jones: And last question now Jason, why should investors consider adding Argo Global Infrastructure to their portfolio?

Jason Beddow: We think it's really diversification, and not having all your eggs in one basket. An ASX listed LIC is a very simple way to get exposure to international stocks and a portfolio. The admin and paper trail is quite cumbersome individually. We also think that the markets have been very hot for the last couple of years, and to be fair, infrastructure hasn't been a sector of great performance, but also from a public perception, it's probably waned a little, but March was a really good reminder for us as to why we put AGLI together.

The Aussie market fell about four and a half percent in March. ALI, or AGLI's NTA was up about two and a half percent, so that's a 7 per cent differential between the infrastructure performance and general equities, just in one month. When markets are going up every day, of course we forget about that, so we think that is a very attractive diversification.

The dividends are growing in the company, and because it has been a little out of favor, I mean, it's currently trading at a reasonable discount to NTAs, so as an entry point for investors, they're not only picking up what we think is an attractive story, but picking it up at a discount.

Rachael Jones: Excellent. Jason Beddow, thanks very much for your time.

Jason Beddow: Thanks Rachael.


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