Timothy Humphreys, Portfolio Manager of the Ausbil Global Essential Infrastructure Fund, discusses the strategy and performance of the Fund, discuss the misconceptions around utilities and the advantages of investing in essential infrastructure amid market uncertainty.
Melissa Darmawan: Thanks for tuning in to Finance News. I'm Melissa Darmawan. Here to talk to us today is the Portfolio Manager of Ausbil's Essential Infrastructure Fund, Tim Humphreys. Tim, nice to meet you.
Tim Humphreys: Nice to meet you too, Mel.
Melissa Darmawan: It's great to have you in the studio. I'd like our viewers to find out more about the fund. Can you give us an introduction?
Tim Humphreys: Definitely! So, the fund is a portfolio of 25 to 45 essential infrastructure companies. So, the best companies that we can find around the world. Essential infrastructure companies are those companies that are essential for the functioning of a normal society. So, things like water, gas and electric utilities, toll roads and airports, mobile phone towers, and some of the long-haul gas and oil pipelines we see around the world. And the way we manage the portfolio is through a combination of trying to find the best pockets of value around the world, but then also doing a very deep dive into analysing the companies from the perspective of quality, valuation, and also ESG. And then when those three line up, then that's when we take a position in a company.
Melissa Darmawan: Thanks for that, Tim. Can you talk us through the performance of the fund?
Tim Humphreys: Certainly. Since the inception of the fund in December 2018, we've delivered annualised return of 11.2 per cent on a net basis, which is around 320 basis points ahead of our benchmark.
Melissa Darmawan: I know that Europe and North America - the two biggest regions in the fund, there's a war in Ukraine and we also have uncertainty around the supply chain. Can you give us your take on this situation and how you've managed through this at this point?
Tim Humphreys: There's a lot of uncertainty in markets at the moment. And I think this is a point in which essential infrastructure really shines through, because not only does essential infrastructure have inflation protection embedded into the companies, but there's also a huge amount of secular growth embedded into these companies as well. So, when we are looking at North America, for example, and the energy transition, replacing coal and gas with renewable energy, there's a multi-decade story there that these companies can access and benefit from the growth story there. And over in Europe, as they change from the re-powering of Europe from Russian gas into renewable, then there's a multi-decade story there as well in terms of the growth of renewables, but not only the growth of renewables, but the need to invest in electricity transmission grids as well. I was recently over in Europe talking to an electricity transmission grid operator in Belgium and Germany, and they were talking about the growth rates that they now have, around about 8 to 10 per cent for the next few years, which are pretty much guaranteed because of the need to increase spending on the grid to bring in all the renewable energy that's going to be built and also to reinforce the grid. So, when I look across the environment today around the world, seeing companies that have 8 to 10 per cent growth locked in for the next few years are few and far between, and I think these kind of companies are going to come more in demand for investors, who are looking for not only defensive growth, but also very strong growth stories in themselves.
Melissa Darmawan: In terms of inflation protection, can you tell us a bit more about that?
Tim Humphreys: Certainly. Around about 95 per cent of the portfolio has effective mechanisms through which it can pass on inflation. So, when we think about regulated utilities, for example, the regulation allows them to pass on inflation to the end customer. And when we think about a toll road that has a concession agreement, the concession agreement allows the company to increase tolls each year in line with inflation. And it's similar to mobile phone towers as well. So, very explicit and highly implicit mechanisms through which companies can pass on inflation.
Melissa Darmawan: How have you managed the risks?
Tim Humphreys: First of all, the definition of essential infrastructure automatically embeds risk aversion into it. We also know the companies that we invest in extremely well. We're all experts on infrastructure and spent our careers looking and researching infrastructure companies. And that has allowed us to see these companies through various different cycles. We also spend a lot of time talking to CEOs and CFOs of the companies to get the feedback from them in terms of what they're seeing on the ground. So, at every stage of our analysis, we're embedding downside protection into the portfolio. And we think that's a very differentiated approach because focusing on downside protection, the preservation of capital, is really important to us, but the vast majority of funds out there are trying to seek to beat an esoteric index. And we don't think that's sort of the philosophy of our fund.
Melissa Darmawan: Let's turn our attention to the portfolio construction piece. What changes have you made to the fund?
Tim Humphreys: We're a very low turnover fund, so, since the inception of the fund, turnover has averaged just over 25 per cent per annum. So, we take a very, very long-term view, very similar to private equity, for example, and we are expecting to own the companies that we invest in for many, many years. What we have been doing at the margin is taking some profits in North America companies, so pipelines and some of the utilities there, and moving that to towards Europe, where some of the inflation protection is more explicit within the utilities over there. So, just adding a little bit more inflation protection into the portfolio.
Melissa Darmawan: What positions are you excited about?
Tim Humphreys: There's a lot of positions that we're excited about in the portfolio. The top holding in the portfolio is a company called NextEra. NextEra is a US-based company. It's 50 per cent, roughly, a Florida utility that provides a very nice stable cash flow and income. And then the rest of the company is a renewable energy company that's really benefiting from the energy transition in the US. And this renewable energy company is the largest generator of wind and solar power in the world. So, it's got a very long-term track record of delivering renewable energy for customers and for regulators around the US. So, for us, it's a really nice blend of secure income with secular growth as well. Another company that we're excited about would be a company called Getlink. Getlink is the company that owns the concession to operate the channel tunnel link between the UK and France out to 2086. There's a lot of capacity on the tunnel, and the competitors to the tunnel would be the ferries, who are burning fuel to take cars and trucks across the channel. So, when we look at a company like Getlink, it's got a really good growth opportunity because of the capacity, but also the ESG story is very strong as well because you're replacing short-haul air flights and also the ferry fuel with increasingly renewable energy that's moving trains through the tunnel as well.
Melissa Darmawan: Tim, it was great to speak with you. Very insightful. I look forward to your next update.
Tim Humphreys: Absolute pleasure. Thanks, Mel.