Listed infrastructure manager 4D is looking to widen its distribution reach to include the institutional market as it approaches a five-year track record of strong performance.
The boutique, founded by CIO Sarah Shaw and global equity strategist Greg Goodsall in 2015, is a part of the Bennelong Funds Management multi-affiliate group. Its concentrated global portfolio has produced an annualised return of 10.2 per cent after fees since inception in March 2016, including more than 11 per cent in November thanks to an overweight position in airports, which soared about a broad market bounce on news of a successful COVID vaccine.
Shaw says that while the firm has had conversations with asset consultants and potential institutional investors, the partners had wanted to prove their philosophy and processes before going to the institutional market. As any small manager will attest, the big super funds and their asset consultants tend to require a lot more convincing and a lot more patience on the part of the managers than other market segments.
Bennelong’s distribution team, led by Jonas Daly, promotes the offering across the market segments. Eric Finnell, who joined Bennelong in April, is the institutional business executive.
Shaw believes that 4D is the only manager among its peers to have beaten all four global infrastructure benchmarks this year. The four indices are the S&P Global Infrastructure, Dow Jones Brookfield, FTSE Infrastructure and the new Global Listed Infrastructure Organisation (GLIO). 4D, however, considers itself index agnostic.
The manager says that the FTSE is the closest match for 4D’s universe of about 800 “real infrastructure” companies (ex-real estate) but will probably use the GLIO after it proves itself. The new index is only 12 months old. 4D’s Australian-based competitors include Magellan, RARE, AMP Capital, Lazard (hedged), Macquarie and Maple-Brown Abbott.
Shaw says that the infrastructure universe has gone from an estimated US$2.5 trillion to US$3.5 trillion in the past five years. In terms of manager capacity, she says: “There should be more than enough for everybody. Unlisted managers want cashflows and there is more competition around the unlisted opportunities. Listed infrastructure allows greater diversification in a portfolio. Of our 40-odd stocks, 8-10 are considered ‘core’ with good cashflows.”
Although the broad consensus of manager capacity limits being between 0.5 per cent and 1 per cent of the total market – or between US$17.5 billion and US$35 billion – 4D thinks that about $10 billion would be comfortable for its own style and process. Capacity is not yet an issue, with the manager currently running about A$200 million for clients.
To date, the big super funds have shown a preference for unlisted over listed infrastructure in their portfolios, but Shaw and Goodsall believe this is turning as the listed market matures.
Listed has a couple of distinct advantages over unlisted. The portfolios can more readily become diversified, as Shaw says, but there is also an anomaly which she and other managers in the space, such as Maple-Brown Abbott, have written papers about. It’s that there is a tendency for the underlying assets in a listed portfolio to trade at a discount to the unlisted market, belying the norm that unlisted should attract a liquidity premium.
On the other hand, manager fees in the unlisted space tend to be higher, and there is little-or-no opportunity to offer super funds co-investment opportunities. On fees, Shaw says that 4D understands what institutional investors want and can accommodate not only generally lower fees befitting their scale but also provide the flexibility to match demand for a different base and performance fees structure if required.
The two main categories of infrastructure are essential services and user-pay assets. Essential services include regulated utilities which are immune for shifts in the economy and their returns are independent of volumes, such as traffic flows. User-pay assets include airports and toll roads which are highly correlated with GDP growth. There is a third and newer category, Shaw says, which is “tower assets” which tends to fir between the two others.
“We think we can actively manage between the sectors,” she says. While ESG considerations are integral to stock selection – 4D is a signatory to the UN PRI – most social infrastructure projects, such as hospitals, do not fit the manager’s criteria. They are known as an “availability” asset, with hospitals, for instance, expanding the number of beds available according to demand. “And there are not many of them in the listed space,” she says.
