First State is a name known to many investors as a leader in Asian and emerging markets but what is less known about this Australian fund management company is that they have expertise in many diverse areas including resources, property and infrastructure.
Infrastructure is a new area for specific investment, although it has been a sector where some fund managers have hunted during the last few years. As it is new, there are few funds around offering specific access to infrastructure investments.
It is often the case that those fund management companies which launch soonest are the most dedicated and keenest to take the asset class seriously. Many firms come in later when the bandwagon has already formed and are merely aiming for funds under management.
I would put First State in with the former group. Peter Meany is head of global infrastructure securities at First State and although he has only been with the firm a short time, he has over a decade of experience analysing infrastructure and utility companies in Australia.
One of the key points about infrastructure companies is that they tend to be monopoly-type businesses, which have the ability both to set the prices and, crucially, increase them annually at least in line with inflation. They also tend to be highly cashgenerative. This should translate into slightly lower risk, more predictable growth over the long term coupled with a relatively high level of income – with the fund expected to have a yield in the region of 3-4 per cent.
The fund will be investing in three specific areas – 40 per cent in transportrelated companies, 40 per cent in utility-related companies and 20 per cent in oil and gas storage and transportation.
Rather than investing in the companies that make the products, this fund will invest in the behind the scenes businesses that are essential but have less price volatility.
As an example, this fund will probably invest in the aviation industry but it will not invest in aircraft manufacturers or airlines, instead it will be looking at airports. You will have to use an airport to travel and it is difficult to build a new one whereas passengers have a choice about airlines and airlines have a choice of manufacturers to buy planes.
Another great example is toll roads. Once a toll road is built, it takes a long time to build a new one. Generally, the companies building these roads would also have agreements that new ones cannot be built for a specific period of time in the same locality.
Mr Meany mentioned one specific road, the New Jersey Turnpike in the US (this is the road where Sonny Corleone was assassinated in The Godfather film). The New Jersey Turnpike has grown its revenue at a rate of 7 per cent a year for the last 53 years.
Not only have more cars used the road but the owner has also been able to increase prices. Technology has also come to the fore to help increase revenues, with one prime example being electronic tags for regular users of specific toll roads.
As well as these more esoteric investments, this fund could also feature names that you may well have heard of, including Severn Trent and Kelda – two of the biggest UK water companies.
I believe that infrastructure will be one of the major investment themes for the next 30-40 years.
More needs to be spent in the developed and developing nations as population growth continues.
Most investment will be from private companies as governments in many countries do not have the cash.
By investing in the First State infrastructure fund you get the opportunity to get in near the ground floor with a fund manager dedicated to the sector who has big incentives to deliver strong outperformance over the long term.
This fund combines the twin characteristics that are popular with many investors, a reasonably high level of income that has the possibility of growing over time combined with capital growth.
Ben Yearsley is senior investment manager at Hargreaves Lansdown