Investing in Essential Services
Have you ever thought about investing in essential services?
From the power that turns on your lights, to the water you drink, to the roads people use every day, these services are essential for our daily life. Irrespective of the market conditions or who’s in government, the demand for these services are predictable and stable.
Investing in infrastructure is about investing in companies that provide these essential services to society.
People have been investing in infrastructure since the 1800’s when US utilities were listed on the New York Stock Exchange. Today, the universe of investable companies is much broader and now includes airports, roads, pipelines and telecommunication towers.
As is the case for most infrastructure, the assets have natural monopolies that face little competition. For example, it makes little economic sense to have 2 sets of electric poles and wires on your street or have 2 parallel motorways headed to the same destination.
Limited competition coupled with the predictable demand means high quality infrastructure companies have generated and we believe, can continue to generate attractive and stable returns for investors.
i) Regulated Utilities, ii) Transport Infrastructure and iii) social infrastructure.
Regulated Utilities include electric, gas and water utilities. As the name suggests, these companies are regulated by a government-sponsored entities who allow these monopolies to earn a fair rate of return with low potential for loss in exchange for delivering these essential services.
Regulation means these utilities are generally protected from changes in demand, inflation and interest rates.
Transport Infrastructure includes such things as airports, telecommunication towers and toll roads. In this case, revenue grows in line with patronage whilst the prices they charge are typically linked to inflation. Think about cars on a motorway which are charged a toll. That toll often rises in line with inflation.
Social infrastructure includes hospitals, schools and prisons. The government takes on the demand risk and the operator will earn availability payments for maintaining the assets.
How do we do it?
At Magellan, our approach to infrastructure investing is built on two principle objectives.
Firstly, to deliver our investors attractive risk adjusted returns of Inflation plus 5% over the medium to long term; and
secondly, to protect our investors from permanent capital loss. This means protecting your capital when the markets go down.
Our team of analysts undertake fundamental research to identify high quality infrastructure companies that have demonstrated their ability to deliver reliable earnings whilst trading at a discount to our assessed intrinsic value. We seek to identify companies who are not sensitive to sovereign risk, competition and commodity price risk.
By doing so, we believe investors should expect attractive real returns over the medium to long term, irrespective of market conditions.