Q:  What is your investment philosophy?

A: We believe that globalization is driving infrastructure spending around the world. We designed our fund to take advantage of this trend in two ways. First, by investing in companies that are generating stable cash flows through existing infrastructure projects and second, by investing in companies that will benefit from the build out of new infrastructure assets.

Today there’s a liquid market in infrastructure securities available to investors, comprised of a diverse group of companies involved in the ownership, management, and development and/or financing of essential services for the advancement of communities around the world. Within this broad universe of infrastructure securities, we believe that there are two dominant investment themes.

First, there are mature infrastructure investments in companies involved in traditionally monopolistic industries with long life assets, such as electric utilities and airports. These companies’ predictable, inflation-linked cash flows offer a low-risk and moderate return profile that is typical of hard asset investments.

Second, companies focused on infrastructure development will benefit from the surge in spending expected for new structures and services – particularly in emerging markets where demand for new infrastructure is most dire. While these investments can carry more volatility and development risk than those focused on mature infrastructure assets, we believe that companies involved in the buildout of basic structures provide an important growth-oriented component to a diversified infrastructure allocation.

Q:  What benchmark do you measure yourself against?

A: We benchmark this fund to the S&P Global Infrastructure Index. This is an adjusted market cap weighted benchmark with 40% in utilities, 40% transportation, and 20% energy.

The benchmark is typically very asset-heavy and more focused on mature infrastructure and less on the development side. Thus, we further define infrastructure to include communications and capital goods (i.e. construction and engineering, raw materials) companies. We certainly want to own mature infrastructure assets but we also want exposure to the development side – that’s where some of the capital goods companies come in.

We expect that companies outside of our benchmark in the communications and capital goods sectors may comprise 5-20% of the portfolio under normal market conditions.

Q:  How did you come up with the idea of this fund?

A: Kensington has a long history in real estate securities investment management. We think infrastructure is a natural extension for our company because it’s typified by long life assets and stable cash flows. In fact, we found that a number of companies we were covering on the real estate side had exposure to infrastructure assets, which is what initially piqued our interest in the asset class. It has many of the same appealing characteristics as real estate investing, not least of which is low correlation to stocks and bonds.

A broad theme supporting investment in this space is the fact that sustainable economic growth over the long term will require increased spending to maintain existing infrastructure assets and develop new infrastructure. If you under fund it, it cuts into GDP growth.

In the U.S., discretionary spending as a percentage of the federal budget has declined from 70% to 30% over the past 40 years. Items like infrastructure spending have suffered as a result and in many countries governments lack the will or ability to raise taxes. So, today, we are seeing the public sector increasingly look to private enterprises to help close the infrastructure spending gap.

Q:  Do you focus on any specific geographic location?

A: This is very much a value-oriented approach focused primarily on developed markets around the globe, so our geographic exposure purely depends on where we find the best risk-adjusted return opportunities within that scope.

We believe that both short and long-term country-specific risks are important to consider in global investing. We use beta as a proxy for short-term risk, while other more qualitative factors must be considered when determining longer-term risk. We adjust for these factors in our dividend discount model, with each country assigned a country risk premium based on six key metrics: political, economic, tax, legal, operational and security.

Our exposure to developed markets will typically be 70% or greater. The share to emerging markets will be 30% or less. Right now, U.S. companies comprise approximately 20% of the portfolio. If more public assets find their way into private hands, increasing the market capitalizations of companies in certain countries, it can affect the weightings within the benchmark and within our fund.

Q:  Could you highlight your investment process?

A: We use a quantitative, bottom up process to analyze infrastructure companies. Our primary metric is discounted cash flow analysis, which we supplement with net asset value (NAV) analysis where appropriate. We also look at secondary measures of value such as price to earnings ratio, price to cash flow, and dividend yield combined with payout ratio. Using these metrics, we arrive at a fair value for each company, and then rank them both relative to their peer group and relative to the entire universe.

We actively screen about 300 companies for this fund, which includes the 75 benchmark S&P Global Infrastructure Index names. We target exposure to the benchmark of roughly 80% or more. We then cull through the roughly 225 names that we follow closely outside of the benchmark and look to invest approximately 20% of the fund in those names. In that way, we can provide exposure to sectors such as communications and capital goods companies, which are not part of the benchmark, but in our view, are a meaningful part of the global infrastructure story. We look to own the cheapest names from amongst the different industry groups -- we definitely have a value focus.