Investors looking for exposure to growth assets with good defensive characteristics should consider an infrastructure fund. At least that is the view of one of Australia’s leading infrastructure fund managers.
RARE Infrastructure’s Income Fund returned 23.6 per cent in 2019 and its Value Fund returned 29.7 per cent.
Senior portfolio manager Charles Hamieh says RARE does not expect to repeat those returns this year but it is forecasting average returns of more than 9 per cent a year for both funds over the next five years – higher for its emerging markets infrastructure fund.
Importantly for investors growing concerned about the risk in high global equity market valuation, infrastructure is a growth assets with defensive characteristics.
Hamieh says that over the past 10 years, RARE’s funds have captured two-thirds of the upside when equity markets are rallying but falling only one-quarter as much as the market when equities correct.
“We fell 30 per cent during the GFC and made it back in 18 months. Markets fell more than that and took three to five years to make it back.
The protection comes because these companies are not subject to business cycles.
“It is asset-based growth with low elasticity to the economic cycle,” he says
In a recent report, Zenith Investment Partners says that while global listed infrastructure funds invest in listed assets, they offer investors drawdown protection. This is because of the characteristics of the companies they invest in, which include stable income, high barriers to entry and monopoly market positions.
Hamieh says that with inflation and interest rates staying low, an asset class like infrastructure is attractive. At such times, investors move into so-called “bond proxies” – assets offering steady income.
The top stocks in the fund are mostly gas and electricity companies. They include Hydro One, a US and Canadian electricity company; Red Electrica and National Grid – both European electricity companies.
Transurban and AusNet Services are a couple of local inclusions.
Portfolio manager Shane Hurst says: “Since inception we have had an ESG overlay. With a focus on sustainability. Our view of a coal plant would be that it would have a short economic life.
“Some of the big utilities in the US have dirty generation portfolios. Those stocks are cheap and we may look at buying them because they are changing the way they do business.
“The investment thesis is that they are going to have to get rid of their dirty assets. We have good interaction with companies on these issues.
“There is a big opportunity in how these companies are changing.”