Lonsec’s 2011 review of the Infrastructure Securities Funds sector covered eight funds – six global funds, one Australian fund and one hybrid infrastructure fund. Just one fund – the Macquarie International Infrastructure Securities Fund – was awarded Lonsec’s highest rating, Highly Recommended.
Andrew Coutts, Investment Analyst responsible for this sector commented, “This is a small and specialised sector with a number of quality managers who each have a number of strengths and competitive advantages.”
“Lonsec has focused on reviewing a select list of higher quality offerings in this review, rather than researching all the products in this space.”
Investment teams build and there’s increased competition for talent
Since Lonsec began its coverage of the infrastructure securities sector in 2006, investment teams have typically enjoyed a high level of stability relative to managers focused on broader equity strategies.
“In part this can be attributed to the size and relative immaturity of the infrastructure securities sector, although hiring freezes resulting from the GFC also likely kept movement to a minimum,” observed Coutts.
“In contrast, over the past 12 months we have seen higher team turnover, with several managers in Lonsec’s universe experiencing departures in investment team staff due to competition from other infrastructure securities managers.”
In the past 12 months, the sector has also been a beneficiary of an exodus of talent from specialist listed and unlisted infrastructure manager CP2 (formerly Capital Partners). “RARE and CFS have added to their ranks with quality personnel from CP2,” said Coutts.
“Lonsec has met with each of these hires during the research process (as well as on previous occasions) and observes a consistent message in terms of the level of discipline and depth of research undertaken in the CP2 investment process, which seems to be highly aligned with the bottom up process adopted by other managers within the sector.”
Emerging markets exposure
While most product mandates typically allow managers to invest in emerging market stocks subject to threshold limits, the extent to which this capacity is used is an important point of distinction between the funds rated.
“Most managers agree that there are long-term trends in emerging markets that are favourable for infrastructure; these economies have undergone significant development in recent years, with a combination of economic and demographic trends such as population growth and increased urbanisation expected to lead to increased demand for infrastructure,” said Coutts.
“Managers fall into two camps – those that invest directly in emerging markets and those that don’t believe expected returns compensate for the increased sovereign, political and regulatory risk in such economies.”
Lonsec believes that managers with broader infrastructure mandates and security selection criteria may be more suitable candidates for investors more open to capitalising on the sector’s expected long-term growth across both the developed and emerging markets.
“Those funds with an OECD focus are likely to provide less volatile returns and provide greater defensive qualities in falling markets,” said Coutts.
“In considering non-OECD infrastructure exposure, investors should be aware that they may be gaining meaningful exposure to emerging markets through their broader global equities allocation.”
