In addition, on the qualitative side, we examine both country risk and past operating history to better understand the risk/return potential of the security. Key operating metrics include margin and revenue trends, cash flow and dividend growth, and the overall quality of earnings and management’s abilities. For example, if we believe that a particular utility is cheap but it looks highly leveraged versus the peer group and it’s in a country that we expect to see large, unfavorable interest rate movements, then we might skip that particular name.

Q:  Do you prefer to invest in emerging markets or prefer to keep your exposure to developed market?

A: While there will be an element of emerging market exposure in the fund, we prefer to gain exposure to emerging markets through higher quality, liquid companies that are domiciled in developed markets and trade on larger exchanges.

For example, Abertis is a Spanish toll road operator with operations throughout South America. We prefer to get exposure to the toll roads in South America through a company domiciled in the EU with high transparency, rather than take a direct risk in some of the more volatile South American markets.

Q:  What are the industries that attract your interest?

A: The five broad categories that we look to invest in are transportation, communications, energy, utilities and capital goods.

The transportation segment is comprised of ports, toll roads and airport companies. We see a lot of value in this group today. When you look at where transactions are happening for individual assets, particularly in the airport and toll road areas, you see private transactions happening at multiples in excess of where the stocks are trading, indicating that the stocks are trading at discounts to their underlying asset values.

In the energy segment, we believe that shipping and pipeline companies will benefit from an environment in which oil production is ramping up. These companies are typically less volatile because production doesn’t move around as much as commodity prices.

In the utilities segment, we are looking at global utilities like E.ON. As the leading German electric utility, E.ON provides exposure both to emerging Eastern European markets and to stable operations within Germany.

As for communications, we believe that one factor that is likely to spur growth in wireless telecommunications companies is the fact that in many places in the world, extensive telephone networks may never be established, but instead will be replaced by widespread mobile phone use. While there are instances of low cell phone penetration rates in certain parts of the world, overall, this is a rapidly growing phenomenon.

In the capital goods segment, we are focused on companies that help to build infrastructure assets. Equipment companies, for example, have a slightly different risk profile because they may or may not have a hard asset component. Instead, these companies will have higher leverage to economic growth.

Q:  How is your research process organized?

A: We categorize the roughly 300 stocks that we closely follow into their respected sectors, industries and sub-industries and then we rank them relative to one another using discounted cash flow as the primary metric, supplemented with NAV. Then, we look at secondary measures of value which can include price to earnings, price to cash flow, dividend yield and payout ratios. We model out the next three to five years of cash flow for each company. Using adjusted discount rates reflecting the local risks for each country, we develop earnings potential for each of these companies. Using these earnings, we generate a list of fair values for each of the companies that we monitor. We also develop a ranking of risk and return measure for each of these companies. Based on these rankings, we construct the portfolio.

Q:  How many positions do you generally have in the fund?

A: Generally, we expect to have between 50 and 65 names in the fund. We will typically own about 40 of the 75 names within the benchmark, and between 5 and 20 names from outside the of benchmark.

Q:  Could you give some examples of your stock picks?

A: Abertis Infraestructuras S.A. in Madrid, Spain is a good example. It has over 1,500 kilometers of toll roads that generate over 80% of its operating cash flow. We like the company because it earns an attractive return on its invested capital versus its weighted average cost of capital and because it provides exposure to some of the growing South American markets. We like the toll road assets because they are trading at a discount to private market valuations.

Q:  How do you add value to the benchmark?

A: The additional return is generated in two ways. First, by selecting the 40 or so most compelling ideas from the benchmark using our quantitative, value-oriented approach to stock selection. Second, from owning infrastructure assets that are not in the benchmark such as the capital goods and the communications which, again, are an important part of the global build-out of infrastructure, but are not represented in the benchmark. When we initiate a position in any of the securities that we like, we are adding to the position incrementally. Generally, the maximum exposure to one company is 10%.

Q:  What drives your sell decisions?