Most investors are aware of the benefits of equity income funds but how many people have thought about buying overseas equity income? The answer, I suspect, is not many. There is no specific sector for global equity income funds, which makes seeking them harder, even more so when you consider a fund such as First State global listed infrastructure, which looks like an equity income fund, acts like an equity income fund but has a name that suggests otherwise.
It might be worth explaining what infrastructure investing is and why it is a similar investment proposition to equity income. Infrastructure assets are all around you. They could be roads, telephone lines, water supply or even railway stations and airports. In short, infrastructure assets are things people use in their everyday lives, which means they are often essential. It can also mean they are run by companies with virtual monopolies – it is difficult to build an airport next to an existing one so the incumbent has pricing power. When you are going on holiday you can choose which travel company you use or which airline to fly with but you will likely depart from the nearest airport possible as it is convenient.
Infrastructure investment holds many opportunities for investors. Companies operating these types of assets tend to benefit from predictable earnings and have good pricing power. This puts them in a strong position and allows them to generate high levels of cash. As a consequence, a high yield can be obtained by investing in their shares – similar to equity income.
Manager of the First State global listed infrastructure fund Peter Meany favours businesses able to capitalise on a more robust outlook for global trade. He expects substantial increases in road, rail, sea and air travel and is particularly positive on businesses operating these services. Central Japan Railway, for example, is one of his biggest holdings. He also has a key position in airports with many benefiting from strong earnings, fuelled by a recovery in airport traffic.
Port operators showed encouraging performance during 2010 as the global economic outlook improved and shipping volumes recovered. Meany believes this should continue in 2011 with companies enjoying robust growth. He has invested in Hamburger Hafer (Port of Hamburg) and Forth Ports, which operates ports in Scotland and England. Other holdings that performed well in 2010 include CSX Corporation, a US rail-based freight transporter, and Vinci, a French toll road operator.
Peter Meany recently added positions in Tokyo Electric Power and Beijing Enterprises, both of which have experienced weakness in their share price he considers unjustified. Tokyo Electric Power offers low-risk cashflows and an attractive yield relative to its peers, while Beijing Enterprises will benefit from the strong consumption growth for natural gas in Beijing and north-east China.
Peter Meany also favours some high-yielding stocks in the UK, including electricity and gas supplier National Grid. The share price has risen recently as investors moved into what are perceived to be defensive companies in the face of continued stockmarket volatility. In total, around 9 per cent of the portfolio is exposed to UK-listed companies, while the biggest regional weightings are in Europe and the US with around 36 per cent and 30 per cent respectively. Some 12 per cent is invested in Japan with a further 9 per cent in Asia, making the portfolio well diversified geographically.
The fund’s qualities should translate into modest growth over the long term, coupled with a relatively high-level yield (currently around 3 per cent), which the manager hopes will stay ahead of inflation. The First State team is well resourced in this area and this fund makes an excellent alternative – or supplement – to equity income.
Ben Yearsley is an investment manager at Hargreaves Lansdown