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Diversification Through Infrastructure Assets
Cohen & Steers Global Infrastructure Fund
Interview with: Ben Morton

Author: Ticker Magazine
Last Update: Jan 25, 11:03 AM EST
The growing interest for diversification away from equities and fixed income has been the driving force behind the Cohen & Steers Global Infrastructure fund. Portfolio manager Ben Morton believes that the asset class can provide similar returns to equities, but with the potential for significantly lower volatility and downside. The fund utilizes both a bottom-up fundamental research and a macro framework to select the right subsectors and companies around the world.

ďIf not monopolies, real-asset infrastructure companies often are duopolies or oligopolies. Ultimately, they have the value of the hard assets and their businesses are very difficult to replicate. These characteristics may lead to predictability of the cash flow.Ē
Q: What is the history of the fund?

A: In 1986, Martin Cohen and Robert Steers established Cohen & Steers as the first investment company to specialize in listed real estate. The firm is headquartered in New York City, with offices in Seattle, Washington, London, U.K., Hong Kong, China and Tokyo, Japan.

As of September 2017, the company had $61.5 billion in assets under management. I joined the firm in 2003, while Cohen & Steers Global Infrastructure fund was launched in May 2004.

Our mutual fund has the longest track record among infrastructure-focused mutual funds on the market. The driving force behind the interest in infrastructure was the recognition that real-asset strategies would be increasingly in demand over time. Investors increasingly diversify away from traditional assets like equities and fixed income to seek more diversification in terms of performance and risk characteristics.

Q: How do you define the asset class?

A: We focus on the owners and operators of infrastructure asset companies that collect fees for usage. These tend to be regulated businesses, often concession-based or contractual infrastructure companies. If not monopolies, real-asset infrastructure companies often are duopolies or oligopolies. Ultimately, they have the value of the hard assets and their businesses are difficult to replicate. These characteristics lead to predictability of the cash flow.

The companies that fit that description are utility infrastructure companies, which include electricity, gas, water, or renewable energy, such as solar and wind. We are also interested in telecommunication infrastructure, or cell tower and satellite companies. Within energy infrastructure, we would invest in pipeline processing and storage facilities. Lastly, the transportation infrastructure includes airports, marine ports, toll roads, and railways.

That universe represents a market of $2.5 trillion. Roughly 90% of the market cap is in the developed markets and only 10% is in the emerging markets.

We avoid infrastructure companies with less or no real-asset component, such as engineering and construction, oil and gas production, materials companies like cement manufacturers. The performance and the cash flow profiles of these companies are very different from what we are looking for. Our strategy is about investing in a real-asset core infrastructure portfolio. The infrastructure service companies tend to be more cyclical businesses and to have much higher beta. They also have higher correlation with the broader equity markets.

Q: Why should investors consider the real-asset infrastructure companies?

A: The interest in the asset class is really high, particularly by institutions around the world. Historically, since the inception of our index, returns are in-line with equities as measured by the MSCI World Index, but with 300 basis points lower volatility and, more importantly, significantly lower downside.

Historically, when the equity markets are down, infrastructure is down only roughly half as much. At a time when equity markets appear to hit all-time highs every day and fixed income offers very little in terms of income and total return, investors look for diversifying the asset classes in their portfolios. Thatís really the biggest driver of interest.

Q: What core principles drive your investment philosophy?

A: The first principle is that we invest in long-duration assets and take a long-term view on ownership of stocks in the portfolio. Second, we recognize that there is an equity wrapper to this asset class, which often creates dislocations and opportunities for active managers to generate value. Stocks get mispriced when the market overreacts to specific situations, so we take an active approach to identifying relative value.

So, the high-level philosophy is relying on long-term core holdings, but if we see dislocations caused by the equity wrapper around these assets, we would actively shift allocations within the portfolio.

The third philosophical point is that we recognize that infrastructure is a fairly inefficient market. There are very few specialists in the many subsectors of the asset class. For example, there arenít many experts on European airports out there. Those are typically covered by generalists or analysts of industrials or transportation. So, there is some inefficiency on the market because there are so few specialists that focus on the listed infrastructure asset class.

Q: How do you translate that philosophy into an investment process?

A: Our process begins with bottom-up fundamental research on the companies, which is done by an experienced and global team. We have a team of nine people, including an analyst in London, who covers European infrastructure, an analyst in Hong Kong, and seven team members in New York, who are portfolio managers or analysts covering the Americas.

We screen the universe for all the companies that we would consider investable, or in other words, the companies that fit our definition of core infrastructure. The bottom-up fundamental research process involves analyzing asset profiles and the regulatory and the political environment, because these companies are typically regulated or, at least, politically influenced businesses.

We also establish a view on the management track record and determine the financial positioning through building very detailed financial models on an asset-by-asset basis for each company we invest in.

The next stage is portfolio construction, which is a two-step process. First, we use a macro framework to identify which subsectors are most likely to perform well in different macro environments based on the economic, regulatory or credit cycle, etc. Although infrastructure businesses have very similar characteristics, such as cash flow predictability, they are also very different businesses. A marine port substantially differs from a regulated utility, so these two businesses would trade differently in different macro environments.

We examine that framework weekly, based upon a 12-to-18 month view on a handful of macro drivers. The model helps us to develop a view on subsector exposure and to define our allocations.

Once we have identified which subsector we want to be exposed to, we use the bottom-up analystsí work on each company to choose the specific companies within the subsector. Overall, we use the macro framework to determine allocations to each subsector, after which we select the securities to own within each subsector using our bottom-up fundamental work on the companies in our universe. Then it is a matter of ongoing oversight of the portfolios. As stock specific subsector valuations change, we can rotate the portfolio.

Q: Whatís the significance of the macro view for your process?

A: It is an essential part of the processes. Every year the dispersion of returns between the subsectors of infrastructure is at least 30% between the top and bottom performing subsector, while during the financial crisis, it was about 70%.

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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc