New fund investing in infrastructure

Kensington Investment Group Inc. in Orinda, Calif., makes a strong case for being uniquely suited to manage the first open-end mutual fund focused on the development and reinforcement of a worldwide infrastructure. Aaron Visse, manager of the four-month-old Kensington Global Infrastructure Fund (KGIAX), cited the firm's history in real estate investing and the parallels between real estate and infrastructure. "We have a background that includes traveling the world researching real estate," he said of the firm, which manages $1.7 billion. Many of the core factors with regard to real estate investing — including long-term-investing characteristics and stable fixed costs — also apply to infrastructure investing, Mr. Visse said. The infrastructure fund has gathered $60 million so far, and he has high hopes for the fund's ability to help establish the asset class in the United States. From the fund's July 17 launch through last Friday, it had gained 6.7%. The Standard & Poor's 500 stock index was virtually unchanged over the same period. "Right now, we're witnessing the emergence of infrastructure as its own asset class," Mr. Visse said. "This is a huge opportunity that is just catching on in the U.S., but one that is much further along in places like Australia, Asia and Europe." A large part of the momentum from which Mr. Visse expects the fund to benefit involves a projection by the World Bank in Washington that $35 trillion will be spent on worldwide infrastructure projects over the next 25 years. The appeal from an investor's perspective, Mr. Visse explained, is that the infrastructure movement is not limited to developing or fast-growing countries such as China and India but also includes developed nations that need to upgrade their roads, bridges and airports, among other facilities. "If the developed nations don't have their infrastructures in place, they know it's going to cut into their [gross domestic product] growth," he said. The Kensington strategy involves a bottom-up investment approach to gaining exposure to both companies that own infrastructure assets such as bridges and toll roads, as well as those companies involved in the construction of infrastructure. One example of an infrastructure asset investment is Calgary, Alberta-based TransCanada Corp. (TRP). TransCanada is the largest pipeline-and-utility company in Canada, with more 36,000 miles of pipeline to transport natural gas to the United States and various independent power producers. This company is particularly appealing to Mr. Visse because of an increased focus on asset-rich investments. "In light of the uncertainty of the global economy right now, we're weighted more toward assets," he said. "Pipelines are pretty monopolistic, which makes a company like TransCanada a good growth prospect without a ton of risk." TransCanada's stock, which closed Friday at $40.03 per share, had gained 2.9% since the start of the year, tying the performance of the S&P 500. Part of the evaluation process involves establishing both a shareholder's and an owner's perspective with each company. The shareholder's perspective, he said, will involve considering factors such as the relative value of similar companies. The owner's perspective, meanwhile, looks at factors such as discounted cash flow and the liquidation value of the assets. Mr. Visse estimated that at least 2,000 companies around the world are participating in the infrastructure market.While the fund has a global focus, it limits its research to companies with market capitalizations of at least $500 million. The fund, which currently holds 50 stocks, has an average market cap of more than $10 billion. "Companies need to be large enough and liquid enough, and then we're looking for focused infrastructure," Mr. Visse said. The research is most heavily concentrated in five areas that include transportation, communications, energy, utilities and capital goods. The fund's focus on those five categories underscores the wide-open nature of the infrastructure investment market. Consider, for example, the S&P Global Infrastructure Index, which includes 75 stocks from 22 countries, divided into three broad categories: transportation, utilities and energy. The fund, which is designed to have an annual turnover rate of about 60%, is currently exposed to 21 countries, with the United States representing the largest exposure at 15.7%. Questions, observations, stock tips? E-mail Jeff Benjamin at jbenjamin@crain.com.