Managers adopting the former, more pure approach to the asset class typically focus primarily upon developed market equities in seeking to provide funds with relatively defensive characteristics whilst able to participate in some degree in cyclical upswings through the more economically-sensitive assets such as toll roads. Two of the key players in this area are Macquarie (made available to European investors by Julius Baer) and First State, both of whom offer quality products built upon rigorous company analysis.
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The Julius Baer EF Infrastructure fund aims to achieve long-term capital growth through investments in companies principally engaged in the provision of non-discretionary services. In practice, the manager seeks stable, defensive growth by investing in companies whose profitability is lowly-correlated with the economic cycle.
The fund is sub-advised by Macquarie Funds Group. Justin Lannen, the fund manager, joined Macquarie in 2007 and has worked in the listed infrastructure sector since 2000. He is supported by a well-resourced investment team comprising a CIO, two other portfolio managers and several dedicated analysts.
In identifying the investment universe, the definition of infrastructure focuses solely on “pure play” companies, thus encompassing the ownership, operation or management of essential services with daily usage and a large customer base. Where a company is diversified, the manager looks for a high proportion of its revenue to come from infrastructure.
Whilst social infrastructure and competitive assets, mostly large-cap utilities, are included in the universe, the majority of holdings are typically active in regulated assets, for example in water and waste provision, and user pay assets, including toll roads and airports. This is a result of the manager’s aim of achieving steady, predictable income, and his consequent preference for companies with limited competition and high barriers to entry. The unconstrained investment process relies upon fundamental, bottom-up analysis. An initial screen includes a qualitative review of country, political, industry and regulatory factors as well as a qualitative assessment of yield, earnings, liquidity and volatility.
Approximately 150-200 companies pass the screen and are subject to detailed bottom up analysis. By modelling each company’s cash flow and valuation through balance sheet analysis and assessment of the quality of the underlying assets, the team seeks to identify undervalued operators. Proprietary models are used to inform the this stage of the process, modelling at least 10 years’ future cash flow when valuing a stock and also examining the company’s operating track record. The manager may also invest funds that own assets directly. These are modelled in the same way as listed companies.
The portfolio typically features around 50 companies with a clear bias towards OECD countries, where the manager is more confident in the long-term predictability of regulation and cash flow. The manager avoids investing in stocks with a dependence on commodity prices. The largest positions tend to comprise 4-5% of the portfolio, while smaller-conviction holdings are sized at 1-2%. Portfolio turnover is typically low and cash usually accounts for 2-3% of assets.
Anthony McDonald, Investment Research Analyst at OBSR, commented: “Benefiting from a well-resourced team and an experienced fund manager, the Julius Baer EF Infrastructure fund is a quality offering within the global infrastructure sector. Justin Lannen’s intimate understanding of the companies in the sector has helped the fund deliver competitive returns.“