Miton Global Infrastructure Income fund launches amid ‘Trumponomics’ and inflation
Today marks the launch of the CF Miton Global Infrastructure fund which aims to provide investors with a consistent level of income of 4-6% in the low-yield environment.
Managed by newly appointed Jim Wright, the fund invests in a concentrated portfolio of 42 infrastructure stocks, out of a possible universe of 413, with its greatest weighting – nearly 60% – held in the US and Canada. By sector, utilities dominate the portfolio with a 35% weighting, but Wright is also seeing interesting opportunities in emerging market telecoms.
For income-seeking investors, the manager says the link between inflation and infrastructure, and how infrastructure stocks can benefit from growing levels of underlying GDP growth, is being ‘underestimated’ and therefore he believes investors can capture reflation in revenues.
Why invest in infrastructure now?
The annual global infrastructure spend is forecast to grow from $2.5trn in 2016 to $4.5trn by 2030 according to recent estimates by Citi Research, and as such, Wright is keen to tap into the global infrastructure trends.
But for the fund manager one of the key reasons to back infrastructure stocks is that companies, and in turn investors, will benefit from rising inflation-linked cashflows.
He says that as we head into a reflationary environment, the pricing power of infrastructure is important. “Think of regulated utilities and long-term pipeline contracts, all have built-in inflators based on the local RPI or CPI and what this gives you in an inflationary environment is revenues that will increase with inflation, unlike other equity sectors where this is doubtful. This linkage can’t be underestimated,” he says.
As a result some 60% of the underlying profits/earnings within the portfolio on day one will have a direct link with inflation.
Another underestimated area of investing in infrastructure stocks is that they can benefit from growing levels of underlying GDP growth.
Wright says: “As an example, regulated utilities have historically seen a multiplier effect on growth rate base against GDP growth. In the US between 2005 and 2015, GDP was 3.8%, but the electricity rate base during that period grew at 6.5% which was quite a significant multiplier.”
Looking back over the performance of infrastructure in the last 10 years, Wright notes the sector has experienced lower volatility than average, and the lowest of any equity sector.
“Volatile and uncertain markets make the benefits of infrastructure investments particularly attractive,” he says. “The sector has proven to be resilient during periods of market volatility versus other equity sectors, while also providing capital growth and stable income returns.”
Turning to valuations which is a “critical part of any investment decision”, Wright argues there will not be a fall in the value of infrastructure equities. Infrastructure stocks have been likened to bond proxies, but comparing the yield from sovereign debt with infrastructure stocks in the EU utility market over the past 20 years, government bond yields fell amid the creation of the EU and then flatlined following the introduction of Quantitative Easing (QE).
Wright says: “There was a close correlation between the yields of infrastructure stocks and sovereign debt during 2000 and 2010, which is what we’d expect with low risk asset classes. But QE broke the relationship and there was a bubble in bond valuations. There was not a similar bubble in valuations of infrastructure stocks and we won’t see a consequent fall in the value of infrastructure equities which are still yielding 5-6%.”
Politics and ‘Trumponomics’ also fuel the argument for investors to turn their attention to infrastructure. President Trump’s ‘America First’ standpoint will see policies launched to make the US self-sufficient, such as bringing the North American oil and gas infrastructure back onshore after going offshore owing to the high cost of labour.
Wright says: “What we know is there’s an abundance of cheap oil and gas in North America. If the US can harness this and be cost-competitive in terms of energy cost, this is where infrastructure comes in.
“If the US can genuinely become energy self-sufficient, it will be indifferent to issues with oil supply from the rest of the world. Harnessing this is such an important part of what’s going to happen in the next five years or so. It’s not just a Republican thing; it’s important for Democrats, Trump and even Obama.”
Where are the best opportunities in infrastructure?
The fund will invest 60% in North America on day one and Wright is keen to capitalise on the rising demand for oil and gas to meet the need for cheap energy, which will replace coal as it “doesn’t have a future in the US”.
He explains that a lot of US communities are still supplied with propane on the back of trucks, so if these gas mainlines can “hook them up” gas will become cheaper, there will be a more reliable supply and that supply will also be much safer.
Telecoms and mobile networks will be a ‘slow burn’ for the portfolio as Wright says we are all consuming vast amounts of data but “we’re not paying the right price for it” owing to regulation and the introduction of Mobile Virtual Network Operators (MVNOs) that can set up a mobile company on an existing network without having to invest a single penny.
“With more fibre and 5G, we need to give telcos an acceptable rate of return and allow them to make money. The regulator is just starting to wake up to this as streaming, growing connectivity and more data use is so crucial for a country’s economic growth. We have to start reigning back regulation to incentivise investment over the next three-to-five years and these stocks can start to perform,” he says.
Wright adds this is a longer-term theme for the portfolio and he currently invests 15% in telcos, mostly in emerging markets where the growth dynamic is stronger. One stock which he says is interesting is Telekom Indonesia (ADR). “In EM telcos, there are 175 million mobile subscribers, already 90 million 4G subscribers and it has great demographics,” he says.
The biggest holding is with Enbridge Inc, a Canadian big stock which owns oil and gas pipelines in North America. It recently completed a merger pushing it to become the number one energy infrastructure company in North America. Another benefit is that 96% of its earnings are derived from long-term contracted revenues and the company expects double-digit dividend per share growth to 2019.
Another stock pick is Xcel Energy which owns regulated electricity and gas utilities across eight US states and has delivered 6.7% annualised dividend growth since 2013. Wright holds 5% in this stock owing to its stable balance sheet and sensible pay-out ratio. He adds the company expects 8% nominal growth and it’s very low risk.
Turning to the UK, Wright only invests in five stocks: Pennon, National Grid, National Express, SSE and Vodafone.
Pennon is a combination of a water company and waste management business that owns South West Water and Viridor Limited. “Some might say it’s a dull asset,” Wright explains. “But it has very good inflation-linked returns and while Viridor has had issues, there’s interesting growth going forward.”
Mobile provider Vodafone makes up 1.5% of the portfolio. Wright says although it has been a serial underperformer for a number of years, he believes the returns will improve in the near future. “Vodafone is the second to none mobile fixed network in Spain, Germany Italy and the UK. It’s not going to transform overnight but it’s a really good undervalued network asset.”