Cliquet (pictured), who runs the £215.8m Lazard Global Listed Infrastructure fund, says infrastructure is similar in nature to index-linked bonds even though it invests almost entirely in equities.“The difference is we invest in the equity of listed PLCs,” he said. “They are equities but they are much lower risk and have the ability to protect against inflation.”
Bonds have traditionally played a key role in investors’ portfolios, balancing the risk taken on by equities and hopefully protecting capital should markets fall.
However, from both a total return and income perspective, bonds – particularly inflation-linked bonds – are failing to perform as they have in the past, creating a real problem for investors who rely on a sustainable income.
Long-dated inflation linked bonds in particular have been battered on the yield front, with investors likely losing money in real terms over the last 10 to 15 years.
Cliquet calls infrastructure “an inflation-linked bond with rising coupons”, meaning it is an asset class with companies that combine a low risk of capital loss with inflation protection and growth in real terms.
To ensure this is the case, the manager aims to invest at the lower-risk end of the infrastructure scale, preferring companies that are exposed to regulatory contracts such as UK water firm Severn Trent.
“We look for companies with a high degree of visibility in their profitability and cashflows,” he said.
Contrary to concerns from other managers about meddlesome politicians and regulators, Cliquet says he prefers to invest in infrastructure projects that are subject to regulatory contracts because this adds a layer of predictability to the stock.
“We call ‘preferred infrastructure’ those infrastructure assets that are regulated monopolies, providing essential services such as transport, energy and water. Their status as regulated monopolies provides a competitive advantage over other infrastructure assets,” he said.
While Severn Trent, which is subject to a regulatory contract, falls within the manager’s investable universe, he says companies such as British utility Centrica do not because they are subject to competitive markets.
Cliquet explains that because often these firms establish regulatory agreements or concessions on a yearly basis linked to inflation figures, he is able to get a clearer picture of the revenue stream, and thus the firm’s ability to cover its dividend.
However, he says focusing on yield has been a real pitfall for the infrastructure asset class, which is why Lazard hasn’t put a yield target on the fund. Instead it focuses on both yield and capital growth.
“If you pay too much just to chase yield, then you will lose capital,” he said.
“[Yield] is an important element, but we think the success factor is a combination of yield and capital appreciation.”
Cliquet says he prefers to invest in infrastructure in the developed world – such as Australia, Europe, the US, Canada and Japan – because these countries have a long track record of stable regulatory agreements.
He says he won’t invest in countries where the legal system is not independent from the political system because there is too much risk associated with corporate governance, something he says lends itself to the developed world.
However, the manager does have holdings in some emerging countries such as South Korea and Chile.
Over the fund’s short history, it has massively outperformed its benchmark, the UBS Global Infrastructure & Utilities 50-50 Australian dollar hedged index, and the FCA Offshore Recognised Equity International sector.
Over the last 12 months, the fund has made 24.85 per cent while its benchmark has lost 6 per cent. The sector gained 6.71 per cent over this period.
The fund has steadily risen on a total return basis since launch in February 2012, apart from a small dip last summer. It has more than doubled the returns of both the sector and index over this time, gaining 52.19 per cent, according to FE Analytics.
It is currently yielding 2.32 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund has also been significantly less volatile than the FTSE All Share over the last 12 months, with an annualised score of 9.02 per cent.
Its benchmark has been even more volatile, with a score of 18.99 per cent.
However, the portfolio has been marginally more volatile than global inflation-linked bonds. The Barclays Global Inflation-Linked index has a score of 6.25 per cent over the last year.
The majority of the fund is invested in transport-related infrastructure. Frankfurt Airport in Germany is its largest holding, at 7.8 per cent. Flughafen Zurich and Atlantia, Italy’s largest toll motorway builder, are also components of the top-10. Gas and utility companies Osaka Gas and Tokyo Gas are also in the top bets.
The portfolio is highly concentrated, with more than half of its assets in the top 10 holdings.
It is available via select platforms and has ongoing charges of 1.03 per cent.
