Best in Class: A fund for uncharted waters

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Best in Class: A fund for uncharted waters

With ‘Fed fatigue’ spreading faster than a winter cold at pre-school, it’s all eyes on the US this week in the hope its central bank finally puts us out of our misery and raises interest rates. At the time of writing, futures traders are saying there is a 70 per cent chance that it will. And frankly, if the Fed doesn’t do it now, will it ever?

No one is anticipating four quick, successive rate rises of 0.25 per cent, which has been the ‘norm’ in the past. Indeed, we could all be sitting here this time next year, wondering if the Fed will ever make a second move upwards. But it would be nice for rates to be slightly higher than the ‘emergency levels’ we’ve seen for nearly seven years, not least for investors who are finding it increasingly difficult to find a decent level of income.

When rates do finally rise, it’s possible things will get choppy for a while. We are, after all, in uncharted waters, and no one really knows what the outcome will be.

In this type of environment, there is one asset class that ticks a number of boxes: infrastructure. It isn’t without its risks – no asset class is. Companies in this universe are subject to a variety of factors that could adversely affect their businesses or operations. Government regulation can be both a positive and a negative, as we saw in the UK when the Labour Party threatened to freeze utility bills during the previous election campaign. Environmental considerations are also high up the agenda, with COP21, the UN meeting on climate change, having concluded last week.

However, on the flip side, it is less volatile than, and has less correlation to, many traditional asset classes. It can also provide inflation-linked returns, stable long-term yields with the potential for capital growth, and defensive characteristics due to underlying investments in essential services. Quite an attractive proposition as both a portfolio diversifier and source of income.

Pick of the bunch is the First State Global Listed Infrastructure fund. First State has been one of the pioneers in providing UK retail investors access to this asset class, and this fund has quickly captured the attention of income-focused investors in this low-yield environment.

Peter Meany has managed it since its launch in 2007, supported by a team of six analysts and fund managers. It invests in ‘hard’ infrastructure, such as bridges and ports, via listed companies that own the assets. Of the circa 180 companies the team has identified and monitored, 40 are included in the portfolio, comprising those Mr Meany believes can earn returns above expectations.

Although the fund has historically been a defensive equity play, the portfolio has shifted emphasis recently towards more economically-sensitive assets, such as freight railways. This move was made specifically to insulate the portfolio from the effect of rising interest rates. Half of the fund is invested in US stocks. The rest is nicely diversified, with holdings in Australia, Canada, the UK, China, Spain, Hong Kong, Japan and Brazil.

It makes for an interesting mix and a combination of holdings you won’t find in more mainstream global funds and, with a beta of around 0.75-0.8 compared with wider global equities, it is a tonic, perhaps, for other ills.

Darius McDermott is managing director of FundCalibre