Last updated: May-24-2019

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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Tuesday, May 09, 2017

What with all the government noise about infrastructure in Canada and the U.S. (as well as points abroad), it’s no surprise that many eyes are focusing on a new fund category recently adopted by the Canadian Investment Funds Standards Committee (CIFSC), Global Infrastructure Equity Funds.

Introduced last year, this category is like a former Utilities category on steroids. According to the CIFSC definition, member funds must have mandates to invest in infrastructure-related companies in sectors “including but not limited to” utilities as well as telecom, energy, transportation, and “diversified infrastructure”.

“Demand for infrastructure stocks as an investment is large, and it’s growing,” says Jason Gibbs, vice-president and portfolio manager at Dynamic Funds in Toronto, and co-manager (with Frank Latshaw) of the Dynamic Global Infrastructure Fund. “After all, compared to bond yields of zero to 2%, if you buy a company and get 4-5-6-7%, and it compounds every year, that can be very rewarding.”

The new/expanded category makes sense in that all infrastructure operations are similar in many respects, regardless of industry. They tend to be single-sourced, often with little or no competition, they’re usually long-term in scope, tend to generate healthy cash flows, and the underlying product is essential. Hence infrastructure has always been a favorite of institutional investors and pension funds.

“Without infrastructure, society would collapse,” Gibbs notes. “Water, power, roads, rail – as populations grow and more people move into cities, you have to expand the infrastructure, and you have to maintain it. In the developed world, we haven’t kept up with our infrastructure, so we have a lot of work to do, and a lot of money will need to be spent. Emerging markets are building brand new. That gives the sector a lot of tailwind. And these are not two- or three- or even ten-year projects. It just goes on and on.”

There are 16 funds in the infrastructure category, and Gibbs points to variations between infrastructure funds as well as the companies in which they invest. “We use a combination of top-down and bottom-up styles, although we’re much more bottom up,” he says. “From the top, we look at which sectors we want, and how much cyclical versus regulated utility exposure we want.

“We consider infrastructure to include pipelines, toll roads, electrical, rail and utilities, but some funds are different – they own telecoms, for example, and we don’t,” Gibbs says. “We’re more focused on the regulated sector. And we’re long-term investors. This fund was established 10 years ago, and we still have some of the same names we owned then.

“From the bottom-up perspective, we try to make sure we’re buying the best companies with the best management in the best industries, at a reasonable price,” says Gibbs, citing Melbourne, Australia-based Transurban Group and Warwick, UK-based National Grid PLC as prime examples.

“We’ve held TransUrban from the beginning and have done very well with it,” says Gibbs. “They have the best toll roads in Australia, where they’re the dominant company, and they have some in the U.S. Their contract prices go up every year, and it’s difficult to replicate that business – good luck trying to build a new toll road somewhere. They generate a good dividend yield, great free cash flow, and good growth.

“National Grid owns electrical transmission lines in the U.K. and the U.S., and they’re 100% regulated,” says Gibbs. “The systems are old and urgently require updating, to the point where reliability is an issue. It’s simple, basic work, not complicated, and the U.S. is certainly keen to have them invest in their infrastructure. It’s a good long-term company with a healthy dividend, lots of free cash flow, with very little competition.”

Other key top holdings at March 31 included Aeroports De Paris SA, American Tower Corp., and Sydney Airport Holdings Ltd Trust Units.

The net result of this strategy is a 5-year average annual compounded rate of return of 11.2% for the Dynamic Global Infrastructure Fund, compared with the category average of 10.1%, with lower volatility than many of its peers.

As for further growth arising from government policies, Gibbs figuratively shrugs: “Trump and Trudeau may make announcements, but they’re just hopes and aspirations. Politicians have been saying the same thing for years, and it doesn’t have much long-term impact. I wouldn’t pay too much attention to political announcements.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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