An Australian specialist fund manager is testing the appetite among NZ investors for a rarely-served asset class – at least on retail tables.
Historically, only large institutions have been able to access unlisted infrastructure but there was a growing demand for the asset class from Australian high-end retail and smaller institutional investors, according to Nicole Connolly.
On a trip this side of the Tasman last week, Connolly, Infrastructure Partners Investment Fund Management (IPIF) founder, was sounding out NZ investor interest in the asset class. Typically, NZ wholesale investors access only listed infrastructure assets through a handful of mainly Australian-domiciled funds including Magellan, First Sentier (formerly Colonial First State) and Maple-Brown Abbott.
But that could change if IPIF can make similar inroads here as in its home country.
In Australia, IPIF has garnered support from a range of clients including self-managed superannuation funds (SMSFs), family offices, wealth managers, financial advisory firms and smaller wholesale investors.
“We also have the fund on a couple of investment platforms: PowerWrap and Netwealth,” Connolly said.
Unlisted infrastructure has several different features than its listed cousin, she said, including lower volatility and more stable income streams.
“But it’s been notoriously difficult to access unless you are a large institutional investor,” Connolly said.
IPIF has ducked under the unlisted infrastructure hurdle by creating a fund-of-funds that currently invests into four underlying strategies: the Utilities Trust of Australia (UTA), managed by Wellington-based infrastructure kings, Morrison & Co; First Sentier’s Global Diversified Infrastructure Fund Hedged Feeder Fund 2; AMP Capital Diversified Infrastructure Trust (ADIT); and, the Macquarie-run The Infrastructure Fund (TIF).
Connolly said the four funds have all built up a solid set of infrastructure holdings (collectively owning stakes in 32 underlying assets) over 20 years or more.
“The managers are actively buying assets but they’re not highly acquisitive,” she said. “Perhaps they might make one or two purchases each year.”
IPIF, however, selects the underlying managers according to a bottom-up process that aims to allocate about half of the fund to growth-linked assets such as airports and toll roads and the remainder to regulated sectors like utilities.
The fund has about $140 million under management with the Morrison & Co UTA currently managing about half of the IPIF money.
Morrison & Co picked up the UTA management rights last year after incumbent, the previously Westpac-owned alternatives manager Hastings Funds Management, was ousted. Hastings, now owned by UK firm Northill, was also replaced as the TIF manager by Macquarie late in 2017.
Connolly said IPIF could eventually add one or two more managers to the mix but out of a total unlisted infrastructure manager universe of about 15 firms “we see only six to eight as investable”.
While IPIF has a global focus, she said Australian assets represent about 75 per cent of the geographical exposure, chiefly due to the weight of opportunities.
Large private open-ended fund managers tend to own most of the eligible infrastructure investment assets, Connolly said.
“But globally these assets are more commonly listed or in closed-ended private equity funds,” she said. “That’s why unlisted infrastructure is a good complement to global listed infrastructure.”
Since inception in 2016, IPIF has delivered investors stable income of between 5-6 per cent, Connolly said, and a total return of almost 8 per cent.
However, in a lower interest rate environment she said returns would likely be compressed.
“We expect income returns of about 3 to 4 per cent and a total return of 8 to 10 per cent net of fees over the next five years,” Connolly said.
IPIF has total “look-through” fees of just under 1.8 per cent, lower than some of the underlying funds.
In addition to the unique aspects of unlisted infrastructure as a portfolio diversifier, Connolly said the reliable, inflation-protected income streams of the asset class were proving attractive to investors as interest rates ratcheted down across the world.
“The low interest rates certainly helps and investors are increasingly concerned about equity volatility,” she said. “Unlisted infrastructure also has a tangible feel – similar to property – that investors can relate to and take some comfort in it as an asset class.”
Prior to launching IPIF in 2014, Connolly clocked up about 20 years in the Australian investment industry including long stints as head of alternative assets for both Telstra Super and Russell Investments.
Earlier this year IPIF raised $100 million from investors to take up new opportunities in the underlying funds. The manager also restructured recently, appointing Jonathan van Rooyen as chief investment officer, and Sean Kim as senior investment analyst – both ex Hastings staff. Last month, Elizabeth van Rooyen (no relation to Jonathan) joined IPIF in a marketing and distribution role.