Trends and opportunities in global infrastructure
July 15, 2013
Q: Where do you think is your best opportunity in today’s infrastructure market?
We believe one of the biggest opportunities is in the natural gas markets, both in the United States and overseas. As shown in the chart below, global consumption of natural gas is projected to increase significantly in the next two decades. This trend could have substantial implications for the infrastructure required to support gas transmission and distribution. For us, whether the price of gas goes up or down isn’t a driver of cash flows — rather, we invest in the stocks of companies that own pipelines or distribution networks, and they tend to make money from the physical movement of the gas from its source to where it is consumed. We believe these types of companies will prosper as demand for gas increases.
Significant technological advances have enabled a surge in the production of shale gas and associated oil, in what is widely acknowledged as the most noteworthy energy development in the U.S. in a generation. The resulting surge in supply, combined with strong demand that's a result of low natural-gas prices, constitutes an exciting opportunity for energy infrastructure providers. In fact, the Interstate Natural Gas Association of America projects investment in natural-gas pipeline infrastructure to reach somewhere between $133 billion and $210 billion over the next 20 years.
A variety of companies in overseas markets are deriving their ultimate economic value from the long-term secular trend of replacing electricity with natural gas in homes and businesses. This trend can aid in lowering energy costs as well as reducing the pollution created by more ‘dirty’ fuels. This trend has been in place for decades and, we believe, will continue well into the future.
Global natural gas consumption, 2008 – 2035
Natural gas is the world's fastest-growing fossil fuel, with consumption increasing at an average rate of 1.6 percent per year from 2008 to 2035.
Source: U.S. Energy Information Administration. Sept. 2011. Latest data available.
OECD refers to the Organization for Economic Cooperation and Organization. An organization that aims to promote policies to improve the economic and social well-being of people around the world.
Chart above is for illustrative purposes only and is not representative of the performance of any specific investment. Past performance does not guarantee future results.
Q: Given the macroeconomic issues that investors face globally, how is your portfolio positioned?
Currently, we are defensively positioned, in part because of what I call “austerity risk.” I believe there will be more austerity measures implemented in many developed countries, including the U.S., and the net effect is going to be a negative impact to economic growth. The world has really seemed to move in a pendulum-type way over the past 2-3 years — from optimism about monetary stimulus as a catalyst for growth, to pessimism about the high debt that resulted from fiscal imbalances.
In regard to our portfolio, we’re finding what we believe are the best relative values in the more defensive names. In our opinion, the more aggressive companies have basically played out most of their upside.
Q: What are the defensive sectors within infrastructure?
It can really vary on a country-by-country basis. In some cases it’s the regulated utilities, where you have regulatory structures that lead to earnings and cash flows that are more predictable and stable over time. On the other hand, some of the large utilities in Europe, for example, are not as defensive because they tend to have greater exposure to commodity or energy prices.
Ultimately, each infrastructure company’s defensiveness is driven by the asset’s underlying regulation or legal structure that governs its future cash flow generation capabilities and the risks therein. We spend a lot of time conducting fundamental research on each company that we consider for investment, to identify not only the opportunities but also the risks of each.
Q: Would you give us an idea about your investment process? What type of market environment would be most challenging for that process?
We seek long-term capital appreciation and current income by pursuing a “bottom-up” (stock-by-stock) approach. Two primary characteristics of that approach are:
- We tend to shy away from commodity exposure because of the volatility of commodity prices.
- We invest according to what we view as the long-term cash flow generative power of an infrastructure company, using a fundamental, valuation-oriented strategy.
Given these biases, we may underperform in a market driven by transitory cyclical trends or where market prices deviate from underlying fundamentals. We believe our portfolio performs best when markets focus on fundamental drivers and when valuation matters.
Q: How would your portfolio perform in a period of rising interest rates or inflation?
Frishberg: One of the general attractions to infrastructure investments are the assets’ pass-throughs, the price increase that get passed along to customers as a result of inflation. We believe they offer a potential hedge against inflation and represent one of the more attractive aspects of investing in listed infrastructure. About half our portfolio has relatively direct inflation pass-throughs — and, by direct, I mean formulaic. With these types of assets, there is a formula that actually sets the pricing power.
For example, one of the toll roads owned by a large portfolio holding has more than 20 years left on its concession. Every year it automatically raises its tolls to account for the prevailing inflation rate at the time. Every year. This powerful type of automatic pass-through gives infrastructure assets the capability to protect against inflation in a meaningful way that many other asset classes likely can’t match, in our opinion.
The views expressed represent the Manager’s assessment of the market environment as of July 2013, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s current views.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting the fund literature page or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.
Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors. Because the Fund concentrates its investments in securities issued by companies principally engaged in the infrastructure industry, the Fund has greater exposure to the potential adverse economic, regulatory, political, and other changes affecting such entites.
“Nondiversified” funds may allocate more of their net assets to investments in single securities than “diversified” funds. Resulting adverse effects may subject these funds to greater risks and volatility.