An active approach to infrastructure investing

Jim Wright

Premier Miton Global Infrastructure Income Fund

We are often asked for examples of how we use an active approach in investing in infrastructure stocks, and while we are always happy to discuss the stocks and sectors that we do own, it is equally interesting to discuss where we take an active position and don’t own stocks and sectors within infrastructure which are widely held, and which have material weighting in sector indices. Perhaps the most significant area where we are not exposed right now is the usage-based toll road sector, which has long been an infrastructure staple.

The view that millennials are less likely to own cars is something of an urban myth, but there are two other significant factors that we believe may prove disruptive to the traditional models which forecast revenues for usage-based toll roads.

Change in working patterns

The first is the change in working patterns for office workers and the increased propensity to adopt remote working. It is too early to say conclusively what the impact of the pandemic will be over the long-term, but it is a reasonable assumption that given the increasing availability of high-speed data connectivity and the precedents set or reinforced during the last two years, there will be fewer commuters on the roads in the future.

And even if this is a relatively small change, the way it might impact toll roads is significant. For many usage-based toll roads, alternative routes exist, but time-sensitive users value the speed and convenience of the toll road. So even though commuters might be a relatively small proportion of overall road users, they are disproportionate users of toll roads.

A significant number of the availability-based toll road assets owned by listed infrastructure companies, particularly in the USA, are “managed lanes” – where some lanes on a highway are free, and others are tolled at a reactive rate to keep them moving. Again, we perceive that a reduction in commuter numbers may have a disproportionate impact on the volume of vehicles, the toll rates and therefore the revenues generated by these assets.

Pay-by-mile road tax

The second factor we consider is the way in which the evolution of the vehicle fleet may impact driver behaviours and the use of passenger cars. According to the UK Office of Budget Responsibility, the duties levied on petrol, diesel, and other fuels in the year to March 2020 was £28 billion, representing 3.3% of all receipts and £1,000 per UK household. Fuel duties are of course a very fair tax, as the government collects revenues based on the distance driven and the fuel efficiency of the vehicle. However, with the increased adoption of electric vehicles, this revenue source will shrink and ultimately disappear, and the government will need to replace these lost revenues.

Technology provides a solution in the form of telematics, tracking and recording each mile travelled by an electric vehicle, and billing the user accordingly. In essence, this is much the same as fuel duty, but the impact of a regular “per mile” bill may well reduce passenger car usage, particularly if alternative provisions – either public transport or bicycle lanes – are more accessible.

Of course, we may be right, and we may be wrong in our long-term view on toll road stocks, but we have the option not to own anything in the sector, even though it is a material part of the listed infrastructure universe, and the benchmark indices. We believe this active approach has the potential to add value for our investors as we can allocate capital to areas which we see as offering significant upside in terms of valuation, without the constraints of having to own stocks and assets which we see as having sub-optimal characteristics.

In the portfolio we have significant allocations to sectors such as telecommunications infrastructure, which naturally benefits from the continued growth in demand for high-speed data, and to regulated electricity utilities which will be one of the drivers of the energy transition. Again, we are unconstrained by a benchmark and can freely allocate the fund’s assets to these infrastructure sectors.

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Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Where investments in a fund are denominated in currencies other than sterling (for example, if a fund holds assets priced in euros), its value will be affected by changes in the relevant exchange rate. Certain other investments, such as the shares in companies with profits from other countries, will also be effected.

Investments are often in large-scale projects whose profitability can be affected by supply problems or rising prices for raw materials or natural resources. Changes in the wider economy and government regulation can also have a significant influence.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

A free, English language copy of the fund’s full prospectus, the Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

 

Financial Promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

 

005787/250222

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