Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, 4D Infrastructure chief investment officer Sarah Shaw reveals the one sector COVID-19 recovery cannot occur without — so you better own some of those shares now.
The Motley Fool: What's your fund's philosophy?
Sarah Shaw: 4D Infrastructure runs a global listed infrastructure strategy.
We have two funds. One's truly global and the other one's a pure emerging market strategy with a narrow definition of what infrastructure is. The [latter] is looking for the owners and operators of essential services or user-pay assets. So a narrow definition, but globally located within the listed infrastructure space.
MF: What's your investment window?
SS: We're looking at 3 to 5-year investment horizons.
We have low turnover within the portfolio. We do a great deal of due diligence on the stocks and the space ahead of investments so that we can really benefit from the value appreciation over that period.
COVID-19 crash
MF: How has COVID-19 affected the infrastructure space?
SS: Unfortunately we were sold off in the March collapse. And disappointingly, we didn't participate as much as it was warranted in the subsequent rally.
[COVID] really created quite a unique buy opportunity for infrastructure. I would try and separate the fundamentals from the stock moves within the listed infrastructure space, because the fundamentals actually did exactly what they should — they were defensive. They really proved their resilience in earnings across the universe of stocks.
This infrastructure is still forecast to deliver earnings growth this year, which I don't think you could say about a lot of the market.
It hasn't participated in the rally, although clearly November and the vaccine news supported [infrastructure stocks] a bit. But there's a real disconnect to the fundamental performance issue and the market reaction.
So we're in a really great buying opportunity anyway. We would also say that COVID-19 has actually enhanced the infrastructure thematic.
There was always an amazing thematic around infrastructure, which is now being fast-tracked. Stimulus programs, cost tracking, infrastructure spend. We've got government balance sheets which are increasingly stretched.
So they're going to rely on all our private sector capital. And we had a very low interest rate environment supporting them at any valuation by future investment. If anything, COVID-19 has enhanced the thematic. Stocks are in incredibly strong positions to capitalise on that. And they're offering incredibly attractive value.
We're quite excited about 2021 and expect an infrastructure re-rating.
MF: Have you got a cash pile to take advantage of those opportunities?
SS: No.
We've got a maximum cash limit of 10%. And we basically went into March with that 10%. But since March, the opportunities have been huge, and we've actually taken the opportunity already to split out positions. We are long-term value investors.
When you have airports that have halved or even utilities, which are reiterating your guidance, but have lost 20% in value. That's a huge buying opportunity. And we're not going to wait for the market to recognise it. We're going to capitalise on it as and when we see it.
MF: So the cash percentage is a bit lower than the maximum 10% now?
SS: Yes. We're pretty much fully invested at the moment.
Buying and selling
MF: What do you look at closely when considering buying a stock?
SS: We're an index agnostic, active manager of the asset class. So we really are looking for both value and quality, but not relative to a size or an index weight.
The big thing that we look for is that it meets our infrastructure definition. It's going to provide us with the characteristics that investors want from infrastructure investment, which is ultimately long-term resilience and visible past growth.
It must [also] be in an acceptable investment destination. By that, I mean the country analysis we do ahead of looking at stock analysis has to meet the jurisdiction and appropriate investment destination.
We are looking at very long-dated assets. So we need to know that the contracts are going to be upheld, the economic environment is supportive, the political environment is supportive.
We separate quality and value. And we really want that right mix of high quality and cheap stocks to build a portfolio. We're looking to be diversified across both regions and sectors.
Our philosophy is to give you access to the best listed infrastructure ideas globally, and a little bit guided by the economical market situation at that point in time.
MF: What triggers you to sell a share?
SS: Numerous things can trigger a sale.
The big one, clearly, is if it's reached fair value. We're not going to hold a quality asset if it's not giving me my absolute benchmark return, which is about 7.5% to 8%. So fair value will be an exit.
Secondly, it would be if something fundamentally changed and it switched the quality of the stock. So if management did something that we weren't in line with, or there was a change in strategy that we didn't believe was infrastructure.
And the third big reason is the country's testament. So if a country is downgraded, that would increase the risk profile. Depending on the downgrade, it could make that country and company uninvestable, which would be an exit for us. It could just mean that there's better value propositions elsewhere in a less risky jurisdiction.
MF: Because you deal with many different countries and jurisdictions, does currency factor in your decision making?
SS: Not really. We are an un-hedged product. There's built-in time where it will be out of consideration.
I wasn't planning to go and pile into US equities back in April when the currency was at 58 cents. That was too much of that headwind. But we believe that over an investment cycle, that the currency really plays out. It can create some volatility within the investment horizon, but the research we've done is that the currency naturally reverts.
The only way we look at currency is that I can sit here now and say, "I think the Brazilian real is a massive tailwind at the moment. I think that it's been completely oversold." And we're very, very happy with our Brazilian exposure, knowing that there'll be a stock re-rating as well as a currency re-rating.
So that hasn't influenced my exit or entry to Brazil, but I'm sitting here hoping that the market ultimately realises that currency re-rating.
What's coming up?
MF: Where do you think the world is heading at the moment?
SS: I think we have sight of the vaccine, which is fantastic news. A US presidential election [is] largely behind us. We have a situation where [coronavirus] cases are still rapidly increasing in parts of the world. So we're certainly not out of the woods.
Our view is that the economic recovery was going to be dependent on policies that were implemented during the crisis. And thankfully from our perspective, governments around the world have thrown a great deal of stimulus at the problem.
Now we don't believe that has been fully felt by the economy as yet. Once that starts flowing through, we believe it's quite a positive scenario. Not only for economic activity, which wasn't actually broken ahead of COVID — it was quite robust — there's quite a huge pent up demand for things like travel and consumption and getting out there.
So we're probably anticipating quite a solid recovery buoyed by all that stimulus and buoyed by the fact that it wasn't broken.
And in our part of the world, which is infrastructure, we're really going to be part of that recovery because a lot of stimulus has been thrown at infrastructure and every dollar you spend on infrastructure, you get a $3 to $5 economic impact.
Without that infrastructure investment, you aren't going to get an economic recovery. So for us it's a little bit of a perfect storm. We see a buoyant 2021 if the vaccines come into play… We see a really buoyant year for infrastructure assets.
Overrated and underrated shares
MF: What's your most underrated stock at the moment?
SS: I think that the entire [infrastructure] sector is undervalued, but if I'm going to go with a stock, I'm going to say the airport space.
I know that's not a stock, but I just think the airport space itself is fundamentally oversold. We saw big moves in November once the vaccine news came out. But prior to that, we've got some pretty stress-tested models in play on passenger recovery… and the airports are offering huge value.
We've got to keep in mind that these are very long dated assets. One to two to three year earnings impact does not derail the thematic.
They are driven by regulatory models, which actually speed a rebalance. So it's not a COVID loss that's going to be perpetuated through into the future. So we really see amazing value and are overweight in airports, which clearly has been painful. But as long-term value investors, we just could not ignore the opportunity that was being offered by a very, very oversold sector.
MF: What do you think is the most overrated stock at the moment?
SS: We see stocks that are not offering the same value — and it's not because of the quality. It's not because of the thematic that we don't like. We love the thematic. But it would be the pure play renewable stocks.
We do own some. There's no question.
While recognising quality, we just can't own because we believe that the marketing prior to now, is what we call 'blue sky'.
We only value what's in place. So contracted or regulated or FID [final investment decision] projects. Now we see that thematic is huge, absolutely huge. And we recognise that these stocks will capitalise on it. But until we know the value proposition of the project or the first secure level or the time to FID or the approval process, we're not going to put it into our valuation.
That's where we're away from the market, is that we just can't value what we call blue sky. But it's like the market is definitely giving them credit to the thematic.
We can gain very attractive, renewable exposure via the integrated regulated utilities that haven't gotten ahead of valuations in our view.
Looking back
MF: Which stock are you most proud of from a past purchase?
SS: It's called Cellnex Telecom SA (BME: CLNX), which is a European tower operator. It's our largest holding in the portfolio.
We're not ahead of the game in recognising the value of towers. I think that the market recognizes the value of towers. But the US towers have been a favoured play. Whereas we saw a huge opportunity in Cellnex at time of listing. They listed in about 2014. Our fund launched in 2016. We took a position at 12 euros.
It's about 50 euros now. It's been as high as 57 euros… we're quite proud of it.
Our decision is really believing the management team, which had a great deal of experience in operating these assets when it came out of the spinoff, which was Abertis. They had a really strong strategy to consolidate the European tower market, which was quite immature relative to the US.
And since that time, they've grown their portfolio from about 6,000 towers to now about 60,000, or contracts underpinning 60,000. So they've really executed incredibly well on their strategic direction.
They've seen three capital raises over the time, which we participated in. It's seen a great deal of M&A activity very, very successfully. And they're now the largest player in the European tower market.
We're quite proud to have recognised that opportunity and not just followed the herd into what are very high-quality US tower companies, which just aren't as cheap and didn't have the growth or consolidation proposition that Cellnex did.
That stock's up about 350% since our entry. And it remains a top position. So we still see significant value there.
MF: That's great — 350% is not bad.
SS: We have had a couple that were up more, but I've chosen this one just because we took a big bet on it. And we took a big bet on a sector that others were going in a different direction.
MF: Considering your funds are specially focused on infrastructure, what sort of clientele do you have?
SS: It varies. Our view is that infrastructure should be an allocation in all portfolios.
But it really depends on your starting point. If you're not in equities, this is a nice first step into equities. If you're high in equities, this is the more defensive way to play equities.
If you want some global exposure, this adds global exposure. If you want yield, it can give you a solid yield.
You've got hugely defensive characteristics but with a massive growth potential due to the thematic. [This] allows you to position infrastructure for both buoyant economic environments and depressed economic environments, as well as catch a market-up performance along the way.
We are excited about 2021, like we were excited about 2020 before COVID. The combination of the fundamentals, the COVID response and the cheap prices justifies a huge year for infrastructure, and we're looking forward to capitalising on it.
