Last updated: May-24-2019

5/26/2019 10:06:29 PM
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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  | Monday, March 04, 2019

When it comes to equity investments, infrastructure-related assets generally don’t inspire much excitement. But in fact, global infrastructure funds were one of the best-performing categories during the tumultuous year ended Jan. 31, 2019 (with a positive return of 1.9%), and ranked eighth over the 10-year period through January (with an average annual compounded rate of return of 9.9%). That compares quite favorably, for example, with Canadian equity averages of -2.8% and 8.0% for one and 10 years respectively. One of the best performers in the 19-fund infrastructure category is the three-time FundGrade A+ Award-winner Dynamic Global Infrastructure Fund.

And those are just the averages. One of the best performers in the 19-fund infrastructure category, the Dynamic Global Infrastructure Fund, generated a 10-year average annual compounded rate of return of 11.3% through the end of January, including 4.1% for the most recent year. Those figures place it among the top decile of all funds in terms of performance over those time frames.

Asked about this outperformance, Frank Latshaw of 1832 Asset Management LP in Toronto, co-manager (with Jason Gibbs and Oscar Belaiche) of the Dynamic Global Infrastructure Fund, says the fund differs in a number of respects from other infrastructure funds.

“As part of the equity income team at Dynamic, we all use a strategy we call Quality at Reasonable Price [QARP as opposed to the more common GARP, or Growth At Reasonable Price],” Latshaw explains. “It’s basically a bottom-up process, but we definitely have top-down familiarity with factors such as the stability of governments, and the regulatory environment.

“We invest only in developed markets, and only in actual infrastructure [owners and operators],” Latshaw adds. “Many would include engineering and construction companies in the definition of ‘infrastructure’, but we don’t have that.”

Latshaw goes on the explain the fund’s four-step selection process: “Our universe is the S&P Global Infrastructure Index and the Dow Jones Brookfield Index, but then we apply a quality filter. Some companies in those indices don’t meet our standards, and it can get nuanced – for example, airport operators may be replaced from time to time, but we want companies that can’t be replaced. So, our investable universe is fairly small.

“The next thing we look at is the regulatory environment – it has to be supportive of a monopolistic industry structure,” Latshaw says. “Regulators that are firm but fair are the best for creating long-term value. They make you work, but then everybody wins: investors; the public; and regulators.

“Thirdly, we look for long-term growth prospects,” says Latshaw. “Infrastructure is often seen as a boring, conservative bond-proxyish investment, one that only produces cash flow, but we also look for growth potential. In fact, if we look at the fund’s track record, we’ve earned a lot more money from growth than from yields.

“Finally, we look for discipline, and it’s not just management teams working well with consumers and regulators,” Latshaw says. “For example, an electricity supplier must replace towers and maintain the system, but they need to do it sensibly over the long term, not push the balance sheet faster than it wants to go. That takes discipline.”

In addition, Latshaw notes that companies under consideration must have a dividend yield that grows over time, and they have to be priced at a discount. And once bought, companies tend to stay in the portfolio a long time. The fund’s current turnover is around 20%, but Latshaw notes that it has been as low as 7%!

As an example of companies with all the desired virtues, Latshaw cites Juno Beach, FL-based NextEra Energy Inc., the largest rate-regulated electric utility in the United States (as measured by retail electricity produced and sold) and, through its affiliates, the world’s largest generator of renewable energy from the wind and sun, as well as being a world leader in battery storage.

“It’s best in class and has a strong balance sheet,” says Latshaw. “It’s regulated, so there is no competition, no economic uncertainty, and there’s lots of long-term growth potential from its Florida operations as well as from the renewable energy side. And every single day, management comes up with ways to further cut costs; their discipline is impeccable.”

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

Notes and Disclaimers

© 2019 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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