US President-elect Donald Trump’s pledge to ramp up infrastructure spending would have little spin-off benefits for investors in the sector, according to Peter Meany, First State Investments (FSI) head of listed infrastructure.
Meany, in NZ recently presenting to local clients, said while the Trump promise might appear to be a “nice thematic” for infrastructure investors “it shouldn’t be overplayed”.
He said any increased US infrastructure spending – if it does appear at all – was likely to take a long time to appear with a number of political and practical hurdles to overcome.
In the first place, Meany said the US Congress would have to approve any infrastructure budget with actual project spending to filter down through myriad state and local government agencies.
While FSI doesn’t invest in construction companies and the like, which would be the first to benefit from any Trumped-up spending, he said US infrastructure sectors such as pipelines and railroads may see a boost if the President-in-waiting follows through on economic stimulation plans.
Meany doubted, too, whether Trump’s alleged aversion to climate change and renewable energy development could stifle the huge growth in the sector.
“All around the world there are things going on with the roll-out of renewables,” he said. “And in the US about 80 per cent of [green energy] developments are driven by state legislation,” he said. “While there are pluses and minuses, we’re actually pretty neutral on how Trump could affect our investment strategies.”
Instead, Meany said FSI was focusing on undervalued assets with a growth trajectory such as toll roads or mobile phone towers.
“There’s a lot of investment in mobile towers to upgrade networks to cope with video-gaming and the move to 5G,” he said.
The FSI infrastructure strategy has an active overweight position in towers – currently about 10 per cent of the approximately $8 billion fund – as well as in three other sectors: toll roads; railroads; and ports.
According to FSI data, the fund’s is almost 8 per cent underweight its least-favoured sector – multi/electric utilities – relative to the FTSE Global Core Infrastructure 50/50 index.
Meany said as an active, bottom-up stockpicker with a “contrarian” bent the FSI fund deviated considerably from the FTSE benchmark. He said FSI screens out about half of the index stocks – based on country risks, governance issues and liquidity, for example – to establish and investable universe of about 120 companies.
As at the end of October, the fund owned 42 stocks with the top 10 holdings representing almost half of the total invested.
Over the last year, the NZ portfolio investment entity (PIE) version of the fund returned 12.6 per cent compared to the benchmark 9.3 per cent, and 16 per cent (versus the index 14.6 per cent) since inception in December 2013.
However, both the fund and benchmark dipped almost 2 per cent over the previous quarter as volatility and rising interest rates buffeted the portfolio.
Meany said while Trump’s proposed infrastructure spend won’t have a direct impact for investors, the President-elect’s promised economic stimulation policies could see interest rates increase further.
“There’s no doubt that falling interest rates have provided a tailwind for infrastructure investors over the last 15 year,” he said. “And it will be no surprise if rising interest rates bring a headwind.”
But Meany said listed infrastructure still offered plenty of opportunities for skilled managers to deliver on the core attributes of the asset class – access to growth, reliable income as well as a measure of capital protection.
“Infrastructure has proved itself as a distinct asset class,” he said. “Maybe 10 years ago it was just a theory, but we have done enough now to prove the case.”
FSI, the fund subsidiary of ASB parent Commonwealth Bank of Australia, has raised about $180 million from NZ institutional investors in infrastructure PIE.