The tables below summarise the Portfolio Manager’s investment process. It is a rigorous and disciplined process which has been employed successfully by the Portfolio Manager across a range of countries, asset classes and securities over many years.
Screen Global Infrastructure Universe
Target companies that exhibit key infrastructure characteristics:
- Stable cash flows
- Primary regulated industries
- Monopolistic/ high barriers to entry
Global infrastructure investment universe:
A$4.6 trillion market capitalisation
Analysts Provide Key Inputs
- Asset profile
- Regulatory environment
- Management track record
- Financial positioning
Valuation inputs derived using uniform sector driver assumptions:
- Earnings/ cash flow
- Long-term growth rates
- Net asset value
Sub-Sector Allocation Model
Rank key macro driver impacts to determine relative attractiveness of infrastructure sub-sectors
Determine over/ underweights for each sub-sector
Overlay top-down country strategy views
Statistical valuation models quantify relative value within sub-sectors using best valuation metrics
- Price/ net asset value
- Price/ earnings (cash flow) multiple vs. growth
- Discount cash flow (DCF)
The Portfolio Manager’s investment process begins with the identification of the core global infrastructure investment universe, screening for sectors and companies that exhibit the key infrastructure characteristics, including:
- stable cash flows;
- largely regulated and monopolistic businesses; and
- high barriers to entry.
The focus on these key characteristics differentiates the Portfolio Manager’s strategy from peers, several of whom broaden their infrastructure mandates to include more peripheral sectors, including materials, construction, engineering and shipping. The Portfolio Manager believes that a portfolio with significant weightings in such cyclical sectors will lead to higher correlations with broader equity markets and will lower the diversification benefits of an infrastructure allocation. Under the Portfolio Manager’s screening process, it has identified approximately 350 companies, with a combined market capitalisation totalling AUD4.6 trillion (as of 31 March 2015). The infrastructure sub-sectors within this universe include airports, pipelines, marine ports, railroads, telecommunications infrastructure, toll roads, utilities and water.
The Portfolio Manager’s analysts conduct research on all companies within the universe described above, formulating independent views on fundamentals, regulatory trends and company financials. In support of this, a meaningful amount of time is dedicated to spending time in local markets meeting with company management teams, visiting assets, and spending time with regulators.
The analysts develop proprietary projections for each company’s earnings, cash flow and dividend growth potential. In the Portfolio Manager’s valuation models, several metrics are utilised, including price/earnings ratios, price/earnings ratio versus long-term growth rates, discounted cash flow, EV/EBITDA, EV/EBITDA versus long-term growth rates, and price-to-net asset value, selecting the most effective metrics for each infrastructure sub-sector.
These metrics are the primary inputs for the Portfolio Manager’s proprietary valuation models, which rank the relative attractiveness of the infrastructure sub-sectors based on several key drivers. Once sub-sector positioning has been determined, the Portfolio Manager’s portfolio managers use the outputs from the security-level valuation models generated by the analysts to quantify relative value within each sub-sector, using the most appropriate valuation metrics for the respective sub-sector.
The utilities and pipeline models use price-to-earnings multiples versus long-term earnings growth and price-to-net asset value, while the transportation and telecommunications infrastructure models use price-to-cash flow multiples versus long-term cash flow growth and price-to-net asset value, typically using DCF analysis to determine the relevant NAVs.
Typically, the Portfolio’s largest overweight positions are securities that are the most undervalued according to the models. Companies that are the most overvalued typically form significant underweight positions or are not owned at all in the Portfolio. As valuations change, capital is re-allocated among individual securities. The portfolio managers’ judgements with respect to risk control, diversification, liquidity and other factors are also key considerations.