New global infrastructure income fund to launch
Miton is launching a global infrastructure income fund called the CF Miton Global Infrastructure Income Fund on 23 March 2017.
The fund will mainly invest liquid large-cap stocks. It will have a portfolio of 40-50 listed global infrastructure companies and aim to provide a sustainable dividend income as well as the prospect of long-term capital growth.
It is expected to have an estimated yield of 4 per cent, with the ambition of growing the dividend by 4-6 per cent per year.
The fund will be managed by Jim Wright, who previously managed the listed infrastructure portfolio for the British Steel Pension fund for over 10 years.
The portfolio will have a diverse geographic exposure, but it mainly focuses on North America, with about 60 per cent of companies being based there due to the 'stable regulatory and operating environment', explains Wright.
'Infrastructure isn't portable, so if there are any reservations about regulation, or the political environment, underlying commodity price risk or competitive risk, we won't invest there,' he says.
'The problem with infrastructure doesn't tend to be with the underlying asset, but with the financial wrapper, which might mean that it's overgeared or that there's greed or incompetence.'
Wright says some might ask: 'Aren't these bond proxies? Why invest in global infrastructure now?' But he argues that while there is a bubble in bond valuations, this is not the case in infrastructure stocks.
The appeal in infrastructure, says Wright, is in its stable underlying income and limited cyclicality.
Wright expects an environment where both GDP and inflation are rising in the US. While some kinds of infrastructure, such as US rail roads, 'will be correlated to underlying GDP, others such as water utilities have weak links to underlying GDP'.
Almost half the portfolio will be weighted in the utilities sector, with the remainder invested in telecoms, transport, and oil and gas pipeline and storage infrastructure.
Demand for oil and gas is expected to rise in the US as cheap energy is crucial for the new administration's economic growth agenda.
'There is an abundance of cheap oil and gas in the US, and Trump's administration is very supportive,' says Wright, explaining that a lot of oil and gas is still transported by truck and rail in the US.
Those utility networks are regulated on the state level, which means that states can be very responsive to their residents' needs, he continues. Therefore there will be a demand for new gas pipelines, which are not only economically better but also a lot safer than propane transported on trucks.
His 'biggest holding from day one', at 6 per cent, will be Canadian Enbridge, which creates energy transport structures across North America. The company generates stable dividend growth and has a good valuation.
The five UK stocks he favours include Vodafone; National Grid; Pennon, a water utility company; and SSE, an energy company.
The fifth stock is National Express, which is also one of the big players in US school buses and Spanish regional buses, and has a business in Morocco as well as the Midlands.
'Volatile and uncertain markets make the benefits of infrastructure investments particularly attractive; the sector has proven to be resilient during periods of market volatility versus other equity sectors, while also providing capital growth and stable income returns,' says Wright.
'Infrastructure assets have regulated or long-term contracted revenues and are relatively uncorrelated to wider macroeconomic cycles.
'Global infrastructure companies have a strong track record of producing stable annual dividends, with income expected to grow over time as companies expand their asset bases and benefit from rising inflation-linked cash flows.'
David Barron, director of product strategy and investment trusts at Miton, says: 'By investing in infrastructure companies, the fund has the potential to deliver long-term dividend income, inflation-linked and risk-adjusted returns, complementing a diversified portfolio.'
The fund will not adhere to a benchmark but has a relatively high active share of 68.5 per cent compared to the FTSE Developed Core Infrastructure 50/50 index (meaning 68.5 per cent of holdings differ from the index), and will sit within the Investment Association global equity income sector.