Investment update: Premier Global Infrastructure Income fund

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  • 11 mins 31 secs
James Smith, Senior Investment Manager, Premier Global Infrastructure Income Fund, Premier Asset Management, discusses what changes have been made to create the portfolio and their impact, income performance, volatility, what bond exposure brings to the portfolio and gives an overview of how he believes the fund will fit into client portfolios.


Premier Asset Management

Premier Asset Management

Tel: 0333 456 9033

Email: [email protected]


MIKE HAMMOND: Hello and welcome to this fund update on the Premier Global Infrastructure Income Fund. My name’s Mike Hammond. I’m Sales Director at Premier Asset Management, and I’m joined today by the Fund Manager, James Smith. Hello James.

JAMES SMITH: Hello Mike.

MIKE HAMMOND: James, firstly, it’s probably worth starting at the changes that we made back in May to create the Premier Global Infrastructure Income Fund. So could you just explain to us what those changes were?

JAMES SMITH: Well, Mike, since I joined Premier in June 2012, we’ve run this fund as a global utilities income focused fund. We’ve now broadened the mandate to encompass other areas of infrastructure, such as roads, rail, airports, seaports and telecommunications infrastructure. But I should also mention that these are areas that share many characteristics with the utilities sector, such as regulated revenue streams or asset-backed revenue streams or long-term concessions such a toll road asset; therefore investing in assets with very high levels of revenue visibility with low levels of competition risk, low levels of commodity risk and low levels of regulatory and political risk.

So, while there have been some changes to the portfolio, and we’ll continue to make those, in essence the objective of the fund remains to achieve a high and sustainable and growing income. In fact, in terms of income growth, we’ve now formalised into the objective a requirement to grow the income, which is something that didn’t exist previously even though we have actually been growing the income very strongly in practice. Lastly, just on in terms of benchmarks, we have for the past five years been using the FTSE All World Utilities Index. We’ve now changed that to the FTSE Global Core Infrastructure 50/50 Index, although as you’re aware we simply use that for a performance comparison. We don’t construct the portfolio in any way by reference to the index.

These sectors often share many similar characteristics to the utility sectors, such as regulated revenue streams, high levels of revenue visibility and very low competition or commodity risk. So, while there will continue to be an emphasis on a high and sustainable income, we’ve also added in, I should mention, an objective to actually grow the dividend over time, thus formalising something we have actually been doing in practice anyway. Lastly, I should point out that historically we’ve been looking at the FTSE All World Utilities Index as a performance comparator. We’ve now changed that to the FTSE Global Core Infrastructure 50/50 Index. But I should mention, you know, as you’re aware we don’t use that as an aid to portfolio construction; it’s simply for performance measurement.

MIKE HAMMOND: OK James, so given that your broadening now the range of assets that you are investing in to incorporate infrastructure, other infrastructure assets, it’s probably worth just spending a bit of time on your expertise in that area.

JAMES SMITH: Yes. Well since I started my investment career I’ve been more of a generalist infrastructure investor, including both utilities and also other areas of infrastructure. In fact I spent 14 years at Utilico, which is a wider more generalist infrastructure company. Although I should also again say that there are many similarities between these different areas of infrastructure. So for instance airports are very often regulated in exactly the same way as an electricity transmission network for instance.

MIKE HAMMOND: OK. So you mentioned that the fund has got an objective to achieve income. So how has the income account performed since you started managing the fund?

JAMES SMITH: Yes we’ve had very strong levels of both the high income and also growing over time. To give you an idea, in the first full year which I was running the fund - that was the year August 2013 - the fund paid a dividend of 3.86p for that financial year. In the most recent financial year to August 2016 the distribution has reached 6.15p. So that’s a growth of about 60% over just four years.

MIKE HAMMOND: So you’ve obviously generated a high level of growing income for investors over the past five years. So how was the capital account performed and also what’s it been like in terms of volatility?

JAMES SMITH: As you point out the return has been very strong. Over the five years, we’ve earned about 96% in terms of total return. That’s about 15% per year. I should add our long-term objective is for double digit returns so 10% plus. So we’re ahead of where we want to be. More importantly though we’re also achieving that with lower than average volatility. This fund sits within the IA Global Equity Income sector and has one of the lowest volatility figures of any fund within that sector. I should also mention that the beta, like the correlation to the market, is about 0.8, making it a very good fund to diversify the portfolio of an investor who also holds other global equity income products.

MIKE HAMMOND: So, given the strong performance from both an income and also a capital perspective, as the fund manager of the fund, why do you believe that the changes that you made are good for investors, and also do you believe that it will change the risk profile of the fund at all?

JAMES SMITH: As you say, we have broadened the scope of type of assets we can invest in, and that brings different kinds of risk into the portfolio. We have extensively tested the portfolio and a model portfolio without noticing any material change in risk. We believe it will diversify the fund’s portfolio which allows us to manage risk more effectively. And that’s not only in case of simply capital but also our income account as well. So we don’t in essence believe there will be a material increase in risk within the fund. In terms of returns, of course we now have a wider pond in which to fish. So we believe we’ll be better able to find new more exciting investments which meet our income and growth objectives.

MIKE HAMMOND: So just looking at the changes then, how are they going to be reflected in the portfolio both in the short term and also in the long term as well?

JAMES SMITH: Yes this will be a gradual process achieved mainly through investment of inflows into the fund and also the natural turnover in the fund that we would normally expect to see. What we’re not proposing to do is to immediately liquidate a large part of existing portfolio and reinvest into these new infrastructure areas. As a guide, I’m expecting over the next 12 months that we will achieve about 25% of the portfolio invested into the non-utility infrastructure areas, although of course that is subject to changing circumstances over time.

MIKE HAMMOND: So, looking at infrastructure as a whole, what is your current view on that sector?

JAMES SMITH: Infrastructure for a few years now has been very much in demand. But there do still remain many high quality companies trading at attractive levels of valuation. I should say that in general high quality developed market infrastructure companies tend to be trading at what we would perceive to be of full value. But there are many still opportunities remaining. What we’re looking for within this fund are misunderstood companies, companies that have been neglected by the market or simply under the radar of other investors, and that’s proved to be a very successful hunting ground for the fund over the past few years. And on that note I should also mention that we have almost 40% of the fund currently invested in emerging markets, where valuations, growth, debt, all those metrics tend to be more favourable than many instances in the developed markets.

MIKE HAMMOND: So given that you’re about a month into the changes, the new portfolio, what changes have you made so far?

JAMES SMITH: Yes, we are progressing our investment work. We never rush into anything. So within the first month we’ve made three new acquisitions of investments. We’ve made an investment in an Italian toll road’s operator called Atlantia. And that’s a very common fund to find in most infrastructure portfolios. We’ve also bought some bonds issued by a Spanish toll roads operator. And we’ve bought the equity of an Indonesian mobile telecom towers business, which again provides us with a very high level of revenue visibility but with very strong long-term growth at a very attractive valuation.

MIKE HAMMOND: James, you just mentioned there that you bought a bond. So what is it that the bond exposure brings to your portfolio and why do you hold bonds?

JAMES SMITH: Yes that’s a very interesting question. We have been quite active investors in bonds over the past few years. Now the type of bonds we’re looking for are not the main stream low yield bonds that most bond investors would typically buy. When we buy a bond we’re looking for an equity-type return i.e. a double-digit return. So we’re looking for companies that have issued bonds that for whatever reason the market is believing or is concerned about in some way. So we’ve made very successful bonds last year in US pipelines, US renewable energy, before that in an Indian energy and oil refining company, and we’ve had extremely successful investment returns from those bonds.

At the moment, sorry I should add currently the portfolio has about 12% exposure to bonds, and that’s down from about 20% through most of last year. As a constituent fund of the IA Global Equity Income sector, we must hold at least 80% of the fund in equities. So that would give us an upper limit of 20% on our fixed income exposures.

MIKE HAMMOND: And I assume the bond exposure is there to give you your stable income stream, I guess.

JAMES SMITH: Yes but also we’re buying bonds typically at quite a large discount, and we’ve also made very strong capital gains on those investments as well.

MIKE HAMMOND: So, finally, James, it would be useful if you could just give an indication of how you would see your particular fund fitting into an overall client portfolio.

JAMES SMITH: What we’re trying to do as you’re aware is to give clients a high stable and growing income. Now at present the yield on the fund is about 5%. And as I mentioned earlier that dividend has grown by about 60% over the past four years. Going forward, I couldn’t realistically say we’d managed to keep that up. I think that would be rather overambitious but, you know, a growth rate of somewhere between 5 and 10% I think is perfectly realistic. So firstly a high income, secondly to act as a diversifier, as I mentioned we have a lower than average beta, and if you look at the investments, the components within the fund, you’ll find relatively few of them within any other portfolio, including other infrastructure funds I should add.

So those are the two main things, diversification and income, and lastly capital growth. We’ve had a very strong return over the past few years in terms of both growth and income, and we’re continuing to find assets which we perceive to be undervalued, which we believe will deliver very strong returns into the future.

MIKE HAMMOND: Thank you very much for your time today, James. I hope our listeners have found that useful, thank you.

JAMES SMITH: Thank you Mike.

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