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Can you provide us with information on the culture and ethos of RARE?
Well firstly, a key point here is that at RARE we are infrastructure specialists managing funds, rather than fund managers managing infrastructure. We’ve built our investment team to be made up of individuals who are passionate about infrastructure, from a wide variety of infrastructure specialist backgrounds. 
For example, we have team members who have worked directly for infrastructure companies, in infrastructure banking, government/regulator advisory, and unlisted infrastructure fund management. We have an enthusiastic team who all share in a passion for the asset class, and we feel this shows through the investment results we achieve.
In terms of our wider culture, our corporate ambition quite simply is to be recognised as a pre-eminent infrastructure investment firm globally.
We believe that this is best served by building a culture that is both highly analytical, but also collegiate. We encourage all members of the team to participate actively in investment matters, apply critical thinking to constantly challenge the status quo, and to fully understand the rationale behind, and analytical process supporting, our valuation of infrastructure securities.
By ensuring each member of the team is empowered to undertake deep stock-specific analysis, whilst sharing that knowledge and research in a collaborative manner with their peers, we believe we are able to achieve superior investment outcomes for our clients.
Do you have any key themes playing out in RARE’s listed infrastructure fund?
At RARE, our investment process is bottom-up rather than determined thematically. We undertake detailed analysis of individual stocks, and the key variables that impact valuation in order to to identify mispriced securities and generate value over time. Nevertheless, the wider economic and investing backdrop also impacts on valuation, and we do see a number of themes running through the portfolio.
For example, we have a constructive view on the US economy, and see significant pockets of attractively priced companies within different sectors in the country. In our flagship Value Strategy, we have a significant exposure to the more GDP-sensitive US infrastructure companies, such as the rail companies, which make up approximately 10 per cent of the portfolio.
We also hold a similar proportion in communications companies, including the tower companies (who erect mobile phone towers and then lease space on these towers to the mobile phone operators). Their business models are strongly supported by significantly increasing data usage, with the US networks in the midst of a multi-year 4G technology upgrade (a story we see repeated in many Western European countries and at a different stage in emerging market countries).
How is the portfolio currently positioned, in terms of sectors and/or types of underlying asset?
In a previous article, we outlined the difference between the more defensive regulated assets, and the more growth orientated user pay assets.
In our Value Strategy approximately 50 per cent of the portfolio is invested in regulated assets and 50 per cent in user pay assets. Retaining a roughly equal split between the two asset types gives us good diversification between the more stable, income-paying nature of the regulated assets, and the more growth-exposed nature of the user pay assets.
In pure sector terms, we have approximately 25 per cent of the portfolio invested in the electricity sector, with around 20 per cent in gas, and 5 per cent in water (together making up the c.50 per cent regulated asset exposure).
Again, this diversification across asset types within the regulated assets (as well as between regulated assets and user pay assets) leads to positive diversification benefits in terms of the risk-return profile that the portfolio as a whole achieves.
On the user pay side, in addition to the circa 10 per cent in communications as previously mentioned, we have approximately 25 per cent invested in rail, 10 per cent in toll roads, and 5 per cent in airports. Having this broad split of holdings across these companies which typically have sales and returns linked to GDP, results in a nicely diversified growth return stream within the portfolio.
Can you provide us with a stock example for the Value Strategy?
The Value Strategy’s largest holding is in a company called Sempra Energy, which is an interesting stock to review. Sempra is a Californian-based gas utility company that owns stable regulated utilities and contracted assets across the US and South America. Sempra’s a good example of the type of regulated asset company that we like to own, as nearly 100 per cent of its business is either regulated or subject to long-term contracts.
Market volatility during the first quarter of 2016 led to investors retreating into the classic flight-to-safety stocks, such as the utility companies. This resulted in Sempra performing favourably over the quarter, leading to it being one of the greatest contributors to portfolio performance over the time period.
Thanks for taking part in this series – could you please say a few closing words?
Infrastructure is an asset class you’re going to hear a lot more about over the next couple of decades, as significant expenditure is required in both the developed markets and emerging markets, to bring current infrastructure stock up to a standard to meet current needs, and to invest to meet future needs.
Alongside this we are seeing the private sector being called upon to provide more and more of this infrastructure, as government balance sheets continue to be under pressure. Global listed infrastructure managers such as RARE are uniquely positioned to benefit from this as we specialise in analysing and investing in the companies that will be providing a lot of this infrastructure.
At RARE we are solely focused on global listed infrastructure. This means we have a detailed understanding of the true underlying return drivers of individual infrastructure stocks (such as regulation and capital structures), so that we can ensure that our investors are getting well rewarded for an appropriate amount of risk in their portfolios, enabling us to meet and exceed our clients’ expectations over the long term.
Nick Langley is a founder, co-chief executive and co-chief investment officer at RARE Infrastructure. The views expressed above are his own and should not be taken as investment advice.
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