Unhedged: APIR TGP0034AU
The Rare Infrastructure Value Fund is a unit trust created to invest in global listed infrastructure securities. The fund’s objective is to provide regular and stable income as well as capital growth, with a focus on minimizing the volatility of those returns. It currently holds $971.6 million under management in a total of 37 securities.
The portfolio is geographically diverse: 39% of its holdings are in North America, 31% in Western Europe, 19% in Asia Pacific with the remaining in Latin America and the Middle East. The fund has a mandate to invest up to 25% of the portfolio in emerging markets.
The Rare Infrastructure fund comes in two versions: hedged and unhedged. We are concentrating on the unhedged version. The fund is benchmarked against the OECD G7 inflation index + 5.5%, rather than a sector index. The fund performance curve currently has returns of 0.8% at one year (5.3% below benchmark), 11.1% at three years (4.7% above benchmark) and 13.7% at five years (6.7% above benchmark). The fund has returned 11.5% since inception (4.6% above benchmark).
It’s my opinion that returns are not the only way we should measure an investment’s worth. This Zenith report notes that the fund has not consistently outperformed a sector-based index benchmark assigned by Zenith or the median manager identified by the research house. However, the same report notes that the Rare fund has had consistently lower volatility than either the assigned benchmark or median manager. In addition, it observes that the fund performs strongly in down-trending markets, outperforming assigned benchmarks in 50% of months during these periods. Both these qualities are important, particularly given the uncertainty in this investment space we have discussed before. These results reflect the fund’s focus on minimizing volatility rather than maximizing a return in the short term.
The portfolio has a weighted average market capitalization of $30.6 billion at September 2016. Currently the fund is weighted slightly towards utilities (52%) and away from infrastructure (44%). The portfolio is holding 4% in cash. The fund has holdings in electricity (27%), gas (20%), rail (21%) as well as smaller positions in communications, water, toll roads, airports and ports. Its largest positions are in Sempra, American Tower, Norfolk Southern and Group Eurotunnel, with the top ten positions making up around 43% of the total portfolio.
The Rare investment strategy is very detailed. The process is discussed in detail in this Zenith report. The fund researches all available listed securities in the infrastructure space, including both utilities and transport excluding airlines and marine. From there, they assess the structure of the investments in terms of asset terms, cash flow predictability, inflation management and whether the company has a monopolistic hold on the market. The focus is on large, well-capitalised companies ($500 million capitalisation and above) with relatively low turnover ($2 million per day, 25% maximum daily turnover). These stocks are compared across a number of financial metrics and a group of around 200 stocks is identified for further analysis and consideration. The fund may also choose to invest in unlisted securities that are anticipated to be publically listed in the medium term.
Those companies considered for inclusion in the fund are researched in person and the specific issues of regulation impacting the company and the location it operates in. This is particularly important in a globally-invested fund focused on infrastructure: a highly regulated environment.
The fund is exposed to a number of risks beyond the ordinary “macroeconomic risk” all investments are exposed to, such as exchange rate risk. This is more complex than just a consideration of the strength of the Australian dollar against the US dollar. It also encompasses exchange rate risks in the countries in which the fund invests. This is more than risks around another “flash crash”, like the one the British pound suffered recently. A long term destabilization or devaluation of a major currency the fund is invested in may have an impact on the fund’s overall value (and that impact could go either way).
The fund is also exposed to the standard volatility risks of investing in listed infrastructure. But as we’ve said on the Constant Investor before: invest in the fundamentals, not in the hype. Diversified across a number of countries, the fund is relatively well hedged against national economic downturn.
As we have discussed before, infrastructure development can involve additional risk. The Rare fund has a policy of holding a maximum of 20% in greenfields (new) projects, a maximum of 20% in developing projects and the remainder in mature projects.
Withdrawals from the fund are usually processed within seven business days, but redemption may be halted in certain circumstances, such as an inability to calculate a fair unit price or large withdrawal requests. The minimum investment is $20 000 and minimum on redemption and subsequent investments is $5000. Distributions are quarterly.
There is a 0.974% net management fee and a performance fee of 10.25% payable when the fund exceeds its benchmark. The total performance fee is capped at 0.3% of the average daily net asset value of the fund in any financial year. The buy spread is 0.2% while the sell spread is 0.15% and the minimum investment is $20 000. Distributions are quarterly.