Portfolio manager on the strategy behind his "total infrastructure approach" and how it can provide investors with a steady income stream
A lead portfolio manager is embracing a “total infrastructure approach” as he moves beyond the traditional definition of the asset class.
Jeff Sayer, who manages the Ninepoint Global Infrastructure Fund, believes the sector provides a vital steady income source through the business cycle, with added benefits.
He stressed how it provides both protection against rising inflation and interest-rate movement because of its nuances. As inflation rises it’s more expensive to replace an existing infrastructure asset, while its long-term financing model makes it less sensitive to rate fluctuations than some would think.
And given its risk-return profile and combination of hard-asset protection and above-average dividend distribution yield, Sayer said it’s become an important asset class and should be part of an investor's diversified portfolio.
The support of big pension funds and institutional investors has only added to the transparency and knowledge of the sector and now individual investors, through public traded securities, can track the performance of the underlying assets and receive their share of the predictable income stream.
Sayer said his total return algorithm seeks companies that are growing 8-10% and then pay a 2-4% dividend distribution.
He said the sector’s popularity is growing thanks to the aforementioned benefits but it remains a relatively unsexy asset class. Sayer tackles this by emphasising the tangible nature of the assets and how they are an integral part of everyday life. For Toronto investors, explaining why the 407 is so valuable – “one of the best infrastructure assets in North America” – hits home because it’s something most residents of the city have paid to use and therefore understand its enviable cash flow.
Such a “long-tail” type of investment also helps balance out a portfolio that may feature a string of growth-oriented tech firms.
So far, so good, you might think. But where does the fund separate itself from peloton? It arrives in what Sayer called a “total infrastructure approach”, which uses his non-traditional definition of the asset class.
Beyond the essential facilities that have traditionally been weighted towards utilities, energy and industrials (such as airports or toll roads), Sayer has looked at other factors that drive a modern digital economy and believes that the importance of communication infrastructure is under-represented in a lot of traditional infrastructure funds and benchmarks.
He told WP: “So what I am looking for are businesses that share a lot of the similar attributes to traditional infrastructure assets. Although they have a different return profile, they may be growing more quickly so have lower dividend yield just because of the nature of the business or industry."
He added that it encompasses several key sectors and concepts – things like Telcos, broadband providers and cellular data traffic, for example. The fund is a large holder of American Tower and Crown Castle.
Sayer is focused on the secure flow and exchange of data as an overarching theme, including e-commerce, payment networks and logistics and distribution assets that facilitate online sales. The internet is also an important theme with regards to data centres, while cloud computing is a vital infrastructure in a developed and modern economy which the fund explores via Microsoft.
“We want to mimic the attributes of traditional infrastructure assets. We want to own the pipeline that takes either a toll or a fee as the data or information flows through. Visa and Mastercard have their payment networks, so there is an exchange fee every time you tap your card. It facilitates information flow and also furthers the exchange of goods and services – it’s truly part of a modern economy’s infrastructure.”
Sayer believes these non-traditional assets share similar characteristics to the likes of roads and railways. They have an irreplaceable hard asset with a high initial capital cost, so it’s hard for a start-up, for example, to emulate Visa or Mastercard’s payment method or do what Google has done in terms of building a dominant user base.
This means there is a higher barrier to entry and some firms have a near monopoly, which is good protection for investors.