Renaissance infrastructure fund favours regulated companies

Managers employ stricter definition of their global investment universe.

Diana Cawfield 19 October, 2017 | 5:00PM

Andrew Maple-Brown, a co-manager of Renaissance Global Infrastructure, says he and his colleagues employ a stricter definition of infrastructure investing than some of his competitors.

"A lot of our peers invest in assets which we don't classify as infrastructure," says Maple-Brown, head of the global listed infrastructure strategy at Maple-Brown Abbott, Ltd., which is based in Sydney, Australia. "Some examples of that are integrated utilities, so we only invest in utilities which are wholly regulated, or substantially regulated. Another example would be railways. We only invest in railway tracks; that's a monopoly asset, not the actual railway cars and competitive businesses that use the tracks, that's a transport business."

Maple-Brown is one of four portfolio managers who manage the Renaissance fund under a sub-advisory contract with fund sponsor CIBC Asset Management Inc., which took effect on June 27. The investment strategy is similar to their firm's global listed infrastructure mandate.

The high-conviction portfolio of 25 to 35 stocks seeks the best ideas among a global universe of about 115 companies that meet Maple-Brown Abbott's infrastructure definition and its valuation criteria. "Investing on a global basis in unloved securities at a point in time," says Maple-Brown, "can lead to price opportunities."

The managers favour companies with stable, predictable earnings, high barriers to entry and low cash-flow volatility. About a quarter of the holdings have long-term contracts in place. These include companies with hard assets such as pipelines, telecommunication towers, airports and toll roads.

The team will typically hold a stock for at least four years, subject to market prices and opportunities. On average, says Maple-Brown, the managers expect their annual portfolio turnover to be about 25%.

Taking a contrarian view, Maple-Brown says the managers find North American pipelines attractive, despite negative market sentiment toward the industry. "Pipelines have had a very tough year in general. The energy sector has been volatile, there's lots of uncertainty in the long-term profile for oil with the development of electric cars and other initiatives."

The managers invest only in pipeline companies that don't have material, direct exposure to fluctuations in commodity prices. They may have long-term contracts, or returns that are regulated. As well, the portfolio's current holdings are weighted toward gas pipelines, not oil pipelines. "Liquid natural gas (LNG) exports, which are really only just starting," says Maple-Brown, "will have a very major impact on the volumes of gas being transported across North America."

Among the Renaissance fund's holdings is  NiSource Inc. (NI), a U.S.-based energy company with subsidiaries in fully regulated natural gas and electric utility companies. NiSource is attractive "because of the increase in residential demand for gas as a less expensive alternative to oil, and the need for investment in gas infrastructure," says Maple-Brown. More importantly, he adds, it's driven by the increased safety standards in the U.S. that require very substantial investment in the replacement of existing city gas networks.

"In NiSource's case, they have announced that over the next 20 years, they will spend US$30 million on mass networks," says Maple-Brown. The managers consider the company to have an attractive return on equity and very strong growth prospects.

A substantial portion of the Renaissance portfolio, currently 18%, is invested in Europe. Holdings include airports, toll roads and railways. Among them is French-based Groupe Eurotunnel, which operates the tracks in the tunnel that runs under the English Channel between the United Kingdom and France.

"In our view," says Maple-Brown, "it's an extremely strategic infrastructure asset. It would be very difficult to build a completely different tunnel." In addition, the Eurotunnel is currently being utilized at only about 55% of its capacity. "That's the type of long-term, strategic asset that we favour, with low cash-flow volatility and a natural inflation hedge."

Eurotunnel also illustrates Maple-Brown Abbott's investment process of fundamental analysis, which involves coming up with future valuations and cash-flow models. "In cases like Eurotunnel," says Maple-Brown, "we're forecasting the cash flows out to the end of the concession in 2086, so 70 years ahead."

Another European equity holding is Flughafen Zurich AG. It operates Zurich airport, which Maple-Brown describes as "the gateway to Switzerland." As a major commercial centre, Zurich is a natural destination for air traffic. "From an airport perspective, it has strong investment fundamentals," says Maple-Brown. Based on the growth rates of passengers going using the Zurich airport, the managers view the valuations as being attractive.

In selecting stocks, high environmental, social and governance standards, or ESG, along with strong management, are favoured characteristics. "We place a particular emphasis on governance aspects," says Maple-Brown. "It's very important that investment decisions for capital allocation are being driven for shareholders."

Maple-Brown adds that investments in infrastructure assets are usually made for the long term and are very capital-intensive, so capital-allocation decisions become proportionally more important. "Having strong management alignment is critical in ensuring that we make good investment decisions."

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
NiSource Inc29.61 USD0.65

About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.