The current investment environment is highly supportive for real assets such as infrastructure and real estate says Jacob Vijverberg, co-manager of the Kames Diversified Monthly Income Fund.
Vijverberg maintains that the low interest rates across the developed world, coupled with the appealing characteristics of listed infrastructure investments, makes the asset class particularly appealing for multi-asset funds including stability, high dividend yield, earnings growth and liquidity.
“Infrastructure as an asset class has on longer term periods outperformed world equity markets*” says Vijverberg. “Over the shorter term, infrastructure tends to out-perform relative to equities when interest rates fall. This is visible in recent performance as over one year infrastructure returned 17% compared to 5% for world equities*.”
The Kames Diversified Monthly Income Fund invests across the spectrum of listed infrastructure, mainly in regulated utilities, toll roads and airports, which according to Vijverberg have “the best differentiating and diversifying characteristics versus global equities.”
Below, Vijverberg highlights a number of the funds infrastructure holdings:
Aena and Sydney Airport
“The airport sector tends to be cyclical and concerns about growth were increasing towards the end of 2018. As a result, the airport sectors sold off. We took this as an opportunity to gain exposure as valuations had become very attractive, buying holdings in Aena, the Spanish airport operator and Sydney Airport. Both holdings subsequently performed well despite lingering concerns on global growth.”
“Transurban is a toll road operator in Australia which owns roads around Sydney, Melbourne and Brisbane. The company is investing in several major toll road projects which should boost cash flow and support longer term dividend growth. Transurban is a good example of how lower rates have benefitted infrastructure; Australian 10y yields declined 1.3% since we bought Transurban in October 2018 while it has returned almost 40%**.”
“Eiffage is part of the French toll road network via its subsidiary APRR. The firm has a construction division (typical for infrastructure companies) and is still trading at a large discount relative to its competitors. The contracting division had decent visibility on earnings, due in part to the “Grand Paris” project in which the company is building several metro lines. Traffic growth and pricing on the toll roads is also a big driver. Light vehicle traffic is mostly dependent on labour growth and consumer confidence, whereas heavy traffic is more directly linked to the industrial sector.
“Although we have some concerns, we do view the reforms of the French labour market as a positive driver of growth. Also we expect Europe to exit the trade driven dip in the industrial sectors once some resolution of the trade conflict between China and the US is signed.”
Vijverberg concludes: “Going forward we expect these types of holdings to deliver strong returns in the long run. However, interest rates, growth and idiosyncratic factors will need to be taken into account in the shorter run.”
*Source: Bloomberg, DJ Brookfield Global Infrastructure, MSCI World index
**Source: Bloomberg as at 21/06/2019.