Lachlan Pike, a portfolio manager at Maple-Brown Abbott in Sydney, Australia, takes a pure approach when investing in infrastructure.
His firm, which manages the Renaissance Global Infrastructure Fund, invests “only in infrastructure businesses we believe will exhibit the strongest combination of expected low cash-flow volatility and inflation protection,” he says.
Companies with these traits are typically those that provide essential services to the communities in which they operate. “[They] have very strong strategic positions and can generate stable cash flows and predictable growth, [within] a wide range of economic conditions,” he adds.
Typically, the infrastructure names his firm has the biggest positions in are well-regulated and have strong contractual positions—think of pipelines and communications towers. “Alternatively, [they] operate under a government concession,” he explains, citing airports and toll roads.
Infrastructure companies that don’t meet these parameters “may be subject to highly cyclical demand risk, or competitive market-based pricing,” he says. “For example, most of the listed investments in the seaport sector typically exhibit very cyclical operations, having only short-dated contracts in rather competitive industr[ies].”
When the economy is stable, “it’s possible these [cyclical companies] might be good investments. But, “they don’t have much earnings stability during periods of economic uncertainty.”
A predictable pick
What Pike likes about airports is they “have much more predictable patronage and, usually, an ability to maintain their margins—even during times of economic downturn.”
One strong name is Zurich Airport, he says, which is the largest in Switzerland. The company “provides an attractive exposure to the moderate passenger growth we see coming through that airport, [which] is being driven by a combination of favourable demographics, increasing rail connections to the airport, and by Swiss Air increasing the size of the planes in its fleet.”
After analyzing that airport’s business structure, Pike says he found it to be “rather conservatively geared, which should support a growing dividend stream back to investors over the predictable future.”
Of course, disasters and bad press can affect airlines. But, Pike says, even though those can change passenger volumes, “what we’ve found is [such events] typically play out in the short-term. So when you look at [the] longer-term growth rate of passengers moving through an airport, it’s typically more stable growth over time.”