Global listed infrastructure has delivered strong absolute returns to investors in recent years. Here's why we favour railroads and European toll roads.
As we enter 2018, our largest overweight position is an exposure to toll roads. The sector contains a number of high quality companies with robust cash flows, high operating margins and effective barriers to entry. The scope of toll road operators to negotiate with governments to secure additional compensation in exchange for capital expenditure gives the sector a growth optionality that is consistently under-estimated by the market. European toll roads are going through an earnings upgrade cycle, as improving economic conditions support consistent volume growth in France, Spain and Italy.
We are also overweight railroads. Japanese passenger rail companies such as East Japan Railway and Central Japan Railway own unique assets producing stable cash flows. These companies have been somewhat overlooked this year as investors have focussed on higher risk areas of the market. They are now trading on appealing valuation multiples, despite robust commuter volumes on their trains, reflecting the Japanese unemployment rate at 23-year lows.
Relative to its benchmark index, the FTSE Global Core Infrastructure 50-50 Index, the UK represents our largest regional overweight. This exposure reflects a substantial holding in regulated utility National Grid. The company, which recently sold a majority stake in its lower-growth gas distribution division, pays a generous and growing dividend, and also owns a highly cash-generative US business. The UK’s recent political uncertainty has caused the stock to trade down to an attractive valuation multiple, moving it to a higher rank within our investment process and causing us to increase our position in the stock.
Global listed infrastructure has delivered strong absolute returns to investors in recent years. A few sectors, particularly airports and some US utilities, have now traded up to valuations that we find difficult to justify on fundamentals. Accordingly, we have an underweight exposure to those sectors heading into 2018.
The Colonial First State Wholesale Global Listed Infrastructure Fund offers a high conviction portfolio of quality infrastructure companies. The managers take a long-term view and focus on fundamental mispricing. Sector and regional exposures tend to be an outcome of bottom-up stock calls and often contrarian in style.