Investing in the "backbone" of society
Infrastructure is a broad term that can mean different things to different people.
We like to think of infrastructure assets as the physical assets that provide essential products or services that communities depend upon for day to day living. These assets include economic infrastructure like bridges, airports, railways, buses, waterpipes and electricity and also social infrastructure such as schools, hospitals and public housing.
Infrastructure is the base upon which economic growth is built – the “backbone” or foundation of society.
Infrastructure, currently a sexy word, has in fact been around for centuries. The Great Wall of China, the Brooklyn Bridge and the Suez Canal are all recognized as iconic infrastructure milestones.
The Great Wall of China was built as a fortification against invasion and stretches for approximately 1,500 miles. The Brooklyn Bridge is the longest suspension bridge of its era. The Suez Canal links the Mediterranean Sea to the Red Sea and is now an integral global trading route. These well-known landmarks have all helped to improve transportation and promote trade and commerce.
The "backbone" of your portfolio
Infrastructure has emerged as an attractive asset class in its own right in recent years. Historically, investment in infrastructure was the domain of governments and governments remain the most significant owners of these assets. However, over the years as the size and scale of investment has increased governments have increasingly sought specialist skills and worked with private companies to develop and manage infrastructure assets.
Infrastructure assets bridge the gap between “lower risk” fixed interest assets and high risk but potentially high return assets such as shares and property.
Infrastructure investment sector features:
- Robust and reliable demand - Steady, growing, demand trends often driven by predictable demographic factors
- Stable and predictable costs - The business are often capital intensive with relatively low and stable operating costs
- Earnings protected against deflation and inflation - Pricing is commonly sticky, for instance set by regulators on a CPI basis. In growth sectors prices may be set from rising marginal costs; many infrastructure businesses have pricing power due to being in relatively uncontested markets
- Defensive - Assets not easily replicated. Services not easily substituted
- Regulatory support for investment - Social pressure for better infrastructure is pressuring regulators to institute stable and suitable rules which defend the value of "sunk capital" and encourage new investment
- "Mega" trends adding extra value - Some infrastructure opportunities offer exceptional risk-adjusted returns through a combination of rising demand and strong market positionsl; rising demand and rising marginal costs of new capacity can create situations where the value of incombent assets rises markedly
Infrastructure assets provide:
Stable and predictable income - the companies we buy generally own infrastructure assets and receive income every time someone uses their service. Because these are essential public services they generate predictable and stable cash flows which investors receive via a dividend.
Capital appreciation and inflation protection – we buy quality assets with high barriers to entry and a sustainable competitive advantage. As these assets become more important for economic and social activity their value increases over time.
Secular growth opportunity - infrastructure is the foundation of modern civilisation. We must keep our utilities running so we can have water, roads and power. For decades, countries around the world have been under-investing in infrastructure and many governments are planning increased investment. We believe this “mega-trend” supports attractive long term returns from infrastructure assets.
Infrastructure fundamentals are attractive – an investment for the times
Transport and energy infrastructure are integral to the functioning of an economy but are still emerging as core parts of most investment portfolios. Evolution of the investment class is coming with greater social recognition of the benefits of private management and ownership and increasing investor interest. Sector growth is in turn driving improvements in economic regulation, secondary market liquidity and broker analysis.
For investors the attraction of the sector comes from life-long hard to replace/replicate assets, value preservation via pricing power and the prospect of valuation up-side from demographic or social change increasing demand. At present the investment outlook is also benefitting because valuations are not strained and governments worldwide are encouraging infrastructure investment with returns to attract capital.
Normally individual investors have difficulty gaining first-rate exposure to infrastructure sectors because they are also highly attractive to large-scale capital-allocators such as Sovereign Wealth and Pension Funds. However, at present the markets are anomalously pricing many listed infrastructure companies at discounts to values seen in "trade" or "whole of company" transactions. As investors make choices between funding new assets and secondary market purchases and wholesale infrastructure funds continue to pursue investment in the sector it is expected that rebalancing between "new", "second hand", "retail" and "wholesale" valautions will benefit the listed sector.
In summary, infrastructure investment offers:
Stability – because infrastructure assets are essential to society they are much less susceptible to a slowdown in discretionary spending.
Heavy investment planned worldwide – spending on infrastructure has been earmarked by many governments as a way to stimulate their domestic economies in the wake of the current global recession.
Population growth – the world’s population continues to increase putting more demand on existing infrastructure assets and driving demand for further expansion or additional infrastructure resources.
Undervalued – the combination of tight credit conditions and less aggressive corporate activity means that companies with cash are in a strong position to buy good assets at attractive prices.
Investing with NZ’s premiere infrastructure investment management team
As has been the case with all of our funds we have sought and attracted the best investment talent to manage your money.
Morrison & Co is recognised as New Zealand’s premiere infrastructure investment management firm. Morrison & Co was established in 1988 as a specialist investment manager focusing on investments in infrastructure (energy, airports, freight transport, public transport), agriculture and related property. Morrison & Co has over $5billion in assets under management with more than twenty senior industry experts and transaction specialists “on the ground” in New Zealand, Australia, Europe and USA. We have known and respected the Morrison & Co team for more than a decade and have demonstrated this respect by investing your funds (or at least those funds invested through the Fisher Funds NZ Growth Fund) in listed company Infratil, which is managed by Morrison & Co.
Morrison & Co has significant experience in Funds Management and is the manager of:
- Infratil Limited – A top NZ listed infrastructure company whose share price perfromance has significantly outperformed the New Zealand Stock Exchange (NZSE) over the period from its inception in March 1994 to the date of of the launch of this Fund;
- Infrastructure investments on behalf of the New Zealand Super Fund; and
- Greenfield Group – An unlisted investment company specialising in rural and agricultural investment management.
Morrison & Co has two areas of specialist investment operational experience in which its executives have decades of operational experience:
- Energy Infrastructure; and
- Transportation Infrastructure
Its executives have a wide range of necessary skills to perform all the roles required of an investment management team and in addition, benefit by having access to the specialist skills of an experienced investment bank and niche advisor to the infrastructure sector. The team includes people who have managed power companies, airports and other infrastructure businesses.
The Investment Manager's substantial sector research undertaken for its Infratil and New Zealand Superannuation Fund mandates overlaps with the Fisher Morrison Infrastructure Fund. The Fund will also be able to take advantage of Morrison & Co's hands-on management derived from the Infratil investments.
Candid communication - we believe in honest, candid communication. We tell you what we companies we invest in and why we like them.
Accessibility – infrastructure investments are often difficult for retail investors to access and research because of government ownership and the limited number of projects or assets available. These opportunities have also tended to be the domain of wholesale investors with large amounts of capital.
NZ owned and based – we seek to maximize the NZ dollar return for you.
Your personal portfolio managers – with Fisher Funds you can talk to the people who manage your money. We are real people investing your money in great infrastructure companies. We like to see ourselves as your personal portfolio manager.
Offering investors access to a global portfolio of handpicked infrastructure assets
The Fisher Morrison Infrastructure Fund aims to provide investors with a regular income and capital appreciation. The fund will comprise a hand picked portfolio of 10 to 15 listed infrastructure assets from around the world. The fund invests in listed infrastructure assets but has the ability to invest in unlisted assets should the right opportunities arise.
The Funds quarterly distribution may be an attractive alternative to your bank deposits, offering a consistent income while also seeking to achieve capital growth to protect your investment from inflation. The Fund is targeting a portfolio cashflow yield of approximately 5% p.a.
The investment universe
- Approximately 200 companies worldwide
- Large, liquid stocks
- Developed countries with GDP per capita at least equal to NZ's
- It is unlikely the Fund will ever hold investments in a large number of companies. It is more likely to hold interests in 10 to 15 companies across a small range of infrastructure subsectors
Currency & risk hedging
Market Risk
- Infrastructure assets are lower risk than normal stocks, thus hedging is only likely to be contemplated if extreme conditions are forecasted and the cost/benefit of hedging is favourable
- Some natual risk reduction will come from investing across infrastructure subsectors
- The mix of cash, bonds and equities will be changed depending on market conditions
- Liquidity risk is expected to be low due to the focus on large liquid, developed country, companies
Currency
- An investor currency of $NZ will be assumed and hedges will be used to reduce the risk from fluctuations in the value of the $NZ
- The position will be reviewed, especially if the value of the $NZ rises markedly
Analysis and investment approach
Morrison & Co undertakes extensive industry profiling to identify mega-trends and risks. Once sectors with the prospect of attrractive risk-adjusted returns have been identified, detailed micro valuation and analysis is undetaken to identify companies favourably positioned to the sector trends. The objective is the selection of stocks which will provide high risk-adjusted returns, and can be held for a long period. Hence justifying the very extensive initial analysis.
To read more about the companies that we hold in the Fund
click here.As the fund is invested we will be keeping you up to date with the composition of assets in the fund.
