Quaero Capital’s Real Assets fund, run by managers Mark Ebert and Christopher Gelli, is to focus wholly on infrastructure investments, moving away from its previous holdings in real estate, forestry and agriculture.
Quaero’s research suggests a potential slowing in growth in real estate values, while the universe of agriculture and forestry stocks is shrinking. The fund will be re-orientated towards the infrastructure sector, which has better prospects in the current environment and an excellent long term outlook. Currently, some 90% of the Fund is allocated to infrastructure stocks; this will be moving to 100%.
Ebert said existing investors had been approached about the change of focus and were supportive of the move.
The fund, now a Luxembourg-registered UCITS structure, will remain an actively-managed, long-only strategy investing exclusively in listed equities, globally. It will continue to be conservatively managed, with no leverage, no shorting, and no hedge fund or private equity holdings, and it will continue to offer weekly liquidity to investors.
The format provides investors with a compelling opportunity to invest in global infrastructure with low fees, maximum liquidity, portfolio transparency and diversification.
Ebert stated, “For investors, the growth fundamentals in certain Infrastructure sectors continue to be attractive. As interest rates start to normalise, investors may gravitate away from investing in infrastructure solely to capture yield and focus instead on infrastructure companies which reinvest their earnings in high return projects. This how we have approached the sector for the past four years, and it will continue to be our strategy moving forward.”
“A considered, conservative approach to listed infrastructure is to invest in companies that have constructed and operate one-off, difficult-to-replicate assets, renting out capacity. This avoids exposure to commodity prices and production margins, smoothing out volatility over the cycles, as we face an era of potentially volatile equity markets,” he said.
The fund will consist of a concentrated portfolio of the managers’ best ideas, comprising approximately 40-50 equity positions with a maximum position size of 6%. Stocks will be selected in conjunction with a constant screening process to identify preferred subsectors, compelling valuations, and recurring, sustainable earnings and cash flow from a universe of 250 companies. The fund will invest principally in developed markets, with opportunistic allocations to emerging markets.
The case for infrastructure
Ebert and Gelli believe that there are two powerful trends underpinning the Infrastructure sector. Many governments are aiming to stimulate economic growth through infrastructure spending and global interest rates are rebounding against a backdrop of broadly improving economic trends and strong fundamentals.
They are confident that an increasing number of investors will make a permanent allocation to the sector due to its solidity, underpinned by physical assets, which addresses demand for secure, inflation-proof investments which are resilient over the economic cycles. “Although we may have fine-tuned the strategy, there is nothing ephemeral here!”, exclaimed Ebert.
The strong prospects of the fund’s investments are related to the underlying business models of its companies, which provide assets and services that are vital to the effective functioning of societies. Demand for these is highly inelastic, providing stable, visible revenues and cash flow.
Furthermore, infrastructure companies preserve monetary value in an inflationary environment. For some, their revenue base is governed by tariffs which are inflation-linked. Excess returns have low correlations to equities, bonds, commodities and hedge funds.
Quaero’s Listed Infrastructure Fund’s universe will include the following sub sectors:
- Toll Roads, Bridges, Tunnels, Ports, Airports, Rail, Bus
- Electricity transmission and distribution, renewable energy
- Communication towers, satellites, cable and telephone networks
- Social infrastructure: Education facilities, healthcare projects
- Oil and gas pipelines and storage
- Water and waste water