A: All of the stocks we cover are ranked in a real-time model relative to one another, relative to the entire peer group and then relative to the universe of stocks that we follow. Two things cause a movement in the rankings; stock price changes and changes in estimate of a company valuation. We own the names that screen at the top of their groups and if it is no longer screening well, then we look to sell the position. We model everything with a three to five year estimate of cash flow, helping us to target an annual fund turnover of approximately 60%. Turnover will be impacted by price volatility and fundamental changes at the company level.

Q:  What kinds of risks do you monitor and what do you do to mitigate them?

A: As long as the global economy is healthy, investment in infrastructure will continue. A global economic slowdown is obviously not going to be helpful for the group. Many of these companies use leverage on their balance sheets, thus, a meaningful up tick in interest rates would have an impact on the valuations for the group. A lot of them operate under regulatory scrutiny, which can make their cash flows more predictable. Depending on the direction of the global economy (of which we have a fairly constructive view currently), we have ways of getting more or less defensive within this space. Infrastructure as a group includes defensive companies with relatively low volatility versus global benchmarks. Capital goods companies, on the other hand, rely on strong economic expansion.

Q:  Could you comment on the growth rates in the companies at a macro level?

A: In terms of the risk-return spectrum, real estate has historically been a low risk and relatively low return vehicle. The high degree of predictability in earnings and high degree of visibility lowers the risk compared to other asset classes. Based on the stocks’ profile, we believe that infrastructure will have higher degree of risk than real estate but that they ultimately will generate higher returns than real estate as the global economy grows. However, the returns in infrastructure stocks tend to be lower (and less volatile) as compared to broader global equities indexes.

In terms of the companies in the Kensington Global Infrastructure Fund, we are looking at yields on the underlying companies over 3%, payout ratios from earnings under 50%, price to earnings of 15 to 16 times, and three year compound annual growth rates in earnings per share of about 8%.

We believe that the risk-adjusted return potential of infrastructure companies are very compelling, which explains our focus on this burgeoning asset class.