This fund is not your average equity offering. It invests in listed shares, but as its name suggests, manager Jon Fitch focuses on infrastructure companies from around the globe. Infrastructure is a somewhat broad concept, but examples would include utility companies, toll road firms and airport operators. In theory, such shares should exhibit lower risk in comparison to other securities because the companies offer essential goods and services that most people or companies have to use in their day-to-day lives. Moreover, they are often in industries where competition is limited by r
egulation. They should thus benefit from steadier, more predictable cash flows than companies in other industries.
Fitch and his team are experienced – They all have extensive experience (seven years at the low end) analysing the sector. The team was assembled in 2004 and they have been running other infrastructure products, similar to this fund, in Australia and the US since 2005. The group carries out a bottom-up analysis of a company’s cash flows. The team actively models around 125 companies and this work also requires them to pay attention to a stock’s yield and the company’s ability to sustain that yield in an inflationary environment (a key danger for regulated entities). The team is looking for companies that have a strategic position within their markets which leads to an inelastic demand for their products, for example, water and oil pipeline companies.
Whilst we like the discipline of this process, there are some clear caveats. First, the fund is brand new in the UK market, so there is not a meaningful track record here to evaluate. Second, while we would expect the fund to be less volatile than a broader equity fund over the long-term, it is by no means a safe-haven product for investors. This is particularly true, in our view, as infrastructure securities have already had an extremely strong run in recent years: The Macquarie Global Infrastructure Index has returned an annualised 16.1% for the five years to 30th April 2007 - share prices have been driven by merger and acquisition activity and bids from private equity groups also looking to diversify their investment, which has possibly stretched valuations in the process. In the short period between 1st July 2007 and the end of August the fund lost 4.9% suggesting it is not completely immune to the more volatile movements of the markets. Moreover, it’s worth noting that infrastructure firms do come with political risk—if a regulator decides a company is making too much money, for example, it could well take action that hampers the firm’s ability to sustain its profits.
We still think this fund has merit as a long-term holding to add diversification to a broader portfolio, and its managers’ experience with the asset class is strong. However, potential investors need to carefully consider the risks before buying in, particularly those pertaining to the sustainability of recent performance among Infrastructure equities in the near term.
