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First State's Meany eyes lucrative Middle East infrastructure
First State Global Listed Infrastructure manager Peter Meany says an absence of the red tape that dogs development in the West makes the Middle East an exciting prospect.
First State Global Listed Infrastructure is one of the 'star picks' in Citywire Selection, our list of investment reccomendations.
The fund manager Peter Meany has been seeking out investment opportunities in the Middle East, which he says does not suffer the same red tape and capacity issues that Western countries often face.
He recently met about 12 investors from the region, primarily from the ex-pat community, who had a combined $1.5 trillion to potentially invest into the asset class, and he contrasted the ease of producing and investing in infrastructure projects in the region compared with new projects in the UK.
‘One of the key challenges for infrastructure development is the time horizons of decision-makers. These projects require long-term planning, but politicians are often distracted by the short-term election cycle.
‘A lack of infrastructure development will impact economic growth and reduce international competitiveness and while the UK debates the expansion of airport capacity in the south east, Dubai will have expanded its existing airport capacity to 75 million passengers and should soon be well advanced in developing a new airport with capacity for a further 160 million passengers.’
Overall, Meany has around 41% of the fund in utilities, and a further 17.5% in toll roads. In a low-growth environment he believes these assets offer the chance of steady and visible incremental growth ahead of inflation.
Adding to electricity utilities
He has been adding to his top-10 stake in electricity provider National Grid (NG.L), which is growing at a steady 6%-8% per year, as well as offering an attractive yield.
‘National Grid has rewarded investors with a consistent and growing dividend. Not only has it paid a 6% dividend yield, but this has grown at more than 8% per annum over the last five years.’
UK water utility Scottish & Southern Energy (SSE.L) is also a top 10 holding, and Meany is attracted to the long-term steady growth potential of many UK–listed utilities.
‘Regulation of water, electricity and gas networks in the UK has been relatively stable and transparent which gives companies the confidence to invest.’
Last month he increased his US electric utilities exposure with the addition of electric and gas firm North East Utilities which he expects to benefit from its ability to impose significant price increases over the next few years.
‘It is a high-quality utility with a strong management team that have a proven track record. The business has limited regulatory risk in the near to mid-term and increased exposure to a growing transmission base that earns returns in excess of state based regulation.’
With Meany viewing electricity transmission as a huge growth area in the US, he has been reducing his exposure to North American energy pipelines and has taken advantage of fears over reductions in regulatory returns to also add another electricity firm ITC Holdings.
‘The combination of low interest rates, the boom in shale gas and M&A activity has created a bubble in valuations [for energy pipelines], and the average multiple now stands at 22 times.’
Adding to freight train exposure
He also took advantage of a dip in the share price of US freight train Norfolk Southern, adding it to the £510 million portfolio after it reported a profit drop on reduced coal volumes as the nation moves further towards shale gas. ‘This is a high quality infrastructure asset with a strong management team,’ he said.
Meany already has a top 10 holding in Australian freight rail operator Asciano as well as a further stake in US railroad operator CSX, and has added to them as he believes they now look too cheap after being sold down on worries over reduced coal transportation volumes.
‘The shale gas boom has created fears of a coal bust. US and Australian rail companies will move less coal than expected, but we think this risk is overplayed with CSX and Asciano trading at just 11 times earnings.’
Freight rail now makes up almost 9% of the fund, while another key growth area is mobile phone masts and satellites which makes up almost 8%.
The largest position at the end of October was Italian toll road operator Vinci (5.9% of the fund) followed by US roadbuilder PPL Corp Com and US mobile mast builder Crown Castle, which made up 4.7% each. Airports contributed 7.6% of the fund, while ports made up 3.2%.
Since the fund changed benchmark in March 2008 to the end of October, it has returned 31% compared to 19.2% by the UBS Global Infrastructure & Utilities 50-50 benchmark index.
Citywire Selection verdict:
Infrastructure is a compelling investment offering protection against inflation and providing a steady income. This type of company tends to be typically defensive and high quality. It has delivered steady returns above world equities through investment in utilities, toll roads and mobile towers and will almost always beat a falling market and lag in a rally. It’s not all defensive, however, with many of its holdings having significant emerging market exposure. One to pick if you are after steady, but not flashy returns, and a yield of 3%.
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