News: Targeting returns through global infrastructure

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    Transcription of Finance News Network Interview with Redpoint Investment Management Head of Investments, Ganesh Suntharam and Senior Portfolio Manager, Alex Stephen

    Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Redpoint Investment Management, to discuss its Global Infrastructure Fund is Head of Portfolio Management, Ganesh Suntharam and Senior Portfolio Manager, Alex Stephen. Ganesh, Alex welcome to FNN.

    Ganesh Suntharam: Thank you.

    Alex Stephen: Hello.

    Lelde Smits: Redpoint’s Global Infrastructure Fund has just become available to retail investors. Could you outline some of the benefits of investing in listed infrastructure?

    Ganesh Suntharam: So the key consideration for retail investors, as with any investor in a falling interest rate environment is: how do I maintain the purchasing power of my cash investments? For an institutional investor, they can simply answer that question by buying a toll road, but for a retail investor that’s not a viable alternative. So what a retail investor would like is a single decision, where they can get the GDP (Gross Domestic Product) growth characteristics of the underlying asset class, and ensure that it’s globally diversified for risk reasons. That’s the primary benefit that our Fund provides to retail investors.

    Lelde Smits: Ganesh, what is the objective of the Fund?

    Ganesh Suntharam: The Fund has two primary objectives. The first objective is to capture the GDP growth characteristics of the underlying asset class. For that we carve out revenue and say: where is the revenue for this company coming from? Does it come from core economic activities such as mobile towers, toll roads, gas pipelines? In addition to that we ensure that the portfolio itself is diversified in terms of risk and therefore, not overly concentrated in any one individual stock.

    The second objective of the Fund is to look at quality. So, what are the financials of the company, are they healthy, are they conservatively leveraged, are they generating good revenues and profit margins? And the second aspect of that is: are the government’s practices of the company good, are they committed to good practices and therefore, managing the sustainability of their assets for the longer term? Those are the two primary objectives we look for in our Funds.

    Lelde Smits: What benefits do you believe an investment in listed infrastructure can bring to a diversified portfolio? And should listed infrastructure also be included in both accumulation and retirement income portfolios?

    Ganesh Suntharam: Infrastructure defined well and with a focus on quality, is an important asset allocation consideration for all investors. This is particularly the case when you have an aging demographic pool and therefore, have greater income needs for that pool. The diversification and lower volatility characteristics of the underlying asset class, as well as the GDP linked growth characteristics of the underlying assets, are an important consideration for all asset allocators. In the retirement phase, the yield characteristics are an important consideration. And in the accumulation phase, the GDP linked growth characteristics are an important feature of the asset class.

    Lelde Smits: Thanks Ganesh. Alex, how does the Fund identify assets and which stock selection metrics do you use to identify which stocks to include in the portfolio?

    Alex Stephen: Firstly we define our universe. So we’re interested in companies that derive more than 65 per cent of their revenue, from the core infrastructure activities that Ganesh has mentioned. This gives us a universal round 155 companies across developed markets. And secondly, we rank those companies based on their financial strength and their environmental and social, and government policies. This is around proprietary methodology and is called the Redpoint rating. We use the Redpoint rating to deselect or de-weight poorer quality companies that we believe will underperform their peer group, in the medium to long term.

    Then thirdly, we look at the level of debt that these companies are holding on their balance sheets. And we again, we deselect or we down-weight companies that we believe are excessively leveraged against their peer group. And thenlastly, we tilt the portfolio towards high yielding stocks, and so the whole portfolio has a stronger dividend return. Those four steps give us a highly diversified portfolio of 100 to 110 companies, which is spread across global developed markets.

    Lelde Smits: Alex can you offer an example of an asset you hold and explain why you’ve chosen to include it in the portfolio?

    Alex Stephen: One of our largest weightings is in National Grid. National Grid is a British multinational electricity and gas company. It owns and operates a large majority of the electricity and gas transmission networks across the United Kingdom, and a good deal of the northeast of the USA. It operates in these regions and is therefore, integral to the smooth running of the economy. And as such, it generates at least 65 per cent of its revenue from core infrastructure and is classified as eligible to our portfolio.It has strong environmental and social government policies; it also has a strong set of financials. And therefore, it rates very well on the Redpoint rating. It has good dividend deals and is only moderately leveraged. So we are very happy to own National Grid in the portfolio.

    Lelde Smits: Finally Alex, could you outline how the Fund has performed?

    Alex Stephen: Yes absolutely. The Institutional Fund’s been running for nearly three years now and is up 70 per cent over that time. That’s over 20 per cent per annum. The Retail Fund has been running for nearly nine months and is a subclass of the main Fund, so performs in line with that.

    Lelde Smits: Thanks Alex and finally Ganesh, infrastructure has been performing well over the past few years. What is your outlook for the next few years?

    Ganesh Suntharam: So global markets have recovered reasonably well since 2008. As Alex has just described in terms of our Fund performance, infrastructure as a whole has performed reasonably well. Despite this, yields in this sector remain fairly priced. But when you actually compare your alternatives in terms of cash and term deposits, the yields in the infrastructure asset class remain, continue to remain attractive.

    Lelde Smits: Ganesh, Alex, thank you for the update from Redpoint Investment Management.

    Ganash Suntharam: Thank you for having us.

    Alex Stephen: Thank you.

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