Investment strategy & process

Investment strategy

The investment strategy will take a high conviction and active approach.  The Portfolio is concentrated across 50 - 100 global listed infrastructure securities. Then, is further diversified across infrastructure sub-sectors and countries, both developed and emerging, based upon the combined top-down and bottom-up analysis undertaken by the Portfolio Manager. Up to 5% of the Portfolio’s NAV may be held in cash securities from time to time, the timing and level of cash holdings will ultimately be determined by the attractiveness of available securities.

Components of the Company’s Investment Strategy

Description

Global listed infrastructure securities 

Provides access to the proven investment philosophy and process of the Portfolio Manager, an award winning global investment manager, specialising in listed infrastructure.

Opportunity to gain diversified exposure to global listed infrastructure securities, outside of the limited opportunity afforded by ASX-listed infrastructure securities.

Disciplined top-down screen of the global infrastructure universe to identify attractive sub-sectors, coupled with detailed bottom-up analysis of individual securities.

Up to 5% invested in cash securities

Provides additional flexibility for the Portfolio Manager to pursue anticipated market opportunities.

However, given the high conviction approach and size of the infrastructure universe, holdings in cash securities are likely to be kept to a minimum.

Exposure to be determined by the attractiveness of available securities, particularly from a valuation perspective.

Investment process

Fundamental research

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:

350 companies
A$4.6 trillion market capitalisation

Analysts Provide Key Inputs

Company research:

  • 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

Portfolio construction

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

Security Selection

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.