In an environment of rising inflation, infrastructure can provide investors with income and growth, says Miton’s Jim Wright as he launches a new fund investing in the asset class.
Wright, who previously ran the British Steel Pension fund, said the Miton Global Infrastructure Income fund will be able to invest in a broader range of asset than some of its rivals, taking advantage of individual utility and telecoms stocks.
‘Other funds and benchmarks are restricted to wireless towers and networks,’ said Wright. ‘I can invest in Vodafone and see these as infrastructure so that represents some interesting opportunities…that will be a key difference.’
He said his overall investment style commits him to investing in companies with a ‘stable underlying income, based on long-term, long-duration assets, and limited cyclicality’.
The model portfolio he has recently run currently has a dividend yield of 4% but he expects the yield on the fund will be slightly higher than this when then the fund is launched.
The 42 stocks in the portfolio will be biased towards North America where US president Donald Trump has pledged to spending $1 trillion on infrastructure. The fund has a 60% weighting to the region.
The biggest holding will be in Enbridge (ENB.N), at 6%, which is North America’s number one energy company following its merger with Spectra Corp last month.
Wright said Enbridge has a ‘highly attractive asset portfolio’ and ‘96% of earnings are coming from contracted revenues’. The company pays out 50% of its free cashflow to investors, and is ‘growing its dividend without overpaying’, he added.
Double-digit dividend growth has been forecast out to 2019. ‘Based on merger synergies and long-term growth prospects, the current share price offers a highly attractive entry level,’ said Wright.
‘Enbridge trades on a price/earnings ratio of 20 times. Over the last five years, Enbridge has traded on a range of between 19 and 26.’
Valuation is an important part of the calculation for Wright, who highlighted Auckland International Airport (AIA.NZ) in New Zealand as an expensive stock he currently would not own. AIA has an embedded value 20 times greater than its earnings before interest, tax, depreciation and amortisation, or ebitda, he said. Despite New Zealand being a popular place to visit, the manager said the stock was ‘priced to perfection so we will not invest’.
The second largest stock in the portfolio is US electricity and gas utility company Xcel Energy (XEL.N), which operates over eight states and has delivered annual dividend growth of 6.7% since 2013 and pays around 62% of earnings per share as dividend.
The company has $18.4 billion of growth projects planned until 2021 and the price/earnings ratio of 17x ‘represents an attractive multiple given its visible pipeline of regulated, inflation-linked growth’, said Wright.
Although the fund will be predominantly invest in US stocks, there are five UK-based companies that have made the grade.
‘The National Grid (NG) stock is going to be core,’ said Wright. He said it was ‘interesting’ that the market missed the sale of 61% of National Grid’s sale business to a Macquarie-led consortium last year for a ‘huge premium’.
Another stock Wright believes was being ‘underestimated’ is energy company SSE (SSE). He said the company is recycling money into offshore and onshore wind farms. ‘Prices are going sky high for projects like that and it is a very cheap stock,’ he said.
Pennon Group (PNN), owner of South West Water, has also made it on to Wright’s list, with the manager describing it as ‘a very stable and some may say very dull asset’.
‘It has very good inflation-linked returns and it also has a waste management company called Viridor that did have some issues but there will be good growth going forward,’ he said.
However, he said telecom companies were in ‘a trough’ although he expected regulatory pressures would ease and encourage growth. ‘At some point returns [in telecoms] will inflect,’ he said. ‘Vodafone have second-to-none networks and this will become very valuable. It’s not going to transform overnight but it is a really good undervalued asset,’ he said.
Wright said 60% of the portfolios assets would be linked to inflation which meant its income and growth should deliver positive returns in real terms to investors.
‘If we are going into a reflationary [rising inflation] environment, what is important is the pricing power of the infrastructure assets.’
‘If you have things like toll roads they continue to have inflators based on RPI or CPI so you know [the return] is increasing with inflation. If we are going into a reflationary environment then those links cannot be underestimated.’
Although higher inflation would raise borrowing costs for infrastructure operators, Wright said regulators would take this into account when defining the returns companies could make so any increases would be ‘neutralised’.