Quaero Capital’s recently re-named Infrastructure strategy, refocused from a wider Real Assets mandate, is now entirely concentrated on infrastructure stocks, with just a 3 per cent cash provision.
The largest exposures are toll roads and tunnels (17 per cent), diversified infrastructure companies (16 per cent), and rail & bus (16 per cent). Rail & bus, agricultural infrastructure and communications towers stocks were largely unchanged over the last month, while waste recycling (the smallest allocation), communications and social infrastructure (also a small allocation), performed poorly.
The strategy is structured so that all holdings can be liquidated in one day and all major currency exposure is hedged for all classes. Currently 81 per cent of the portfolio is hedged. The strategy, with 36 stocks, maintains broad diversification among infrastructure sub-sectors.
Toll roads and tunnels stocks were affected by bond market weakness in June, but are still paying significant dividends. The biggest loser has been Eurotunnel. The refinancing of the group's Tranche C debt has been finalised, thereby reducing the average cost of debt by 2 per cent to just under 4 per cent, and releasing EUR260 million in cash to bolster the Eleclink project. Eurotunnel reported a fall of 7 per cent in passenger shuttles for June, but we increased our stake on the share’s weakness.
Vinci SA was down 4 per cent as press reports circulated that it was preparing a bid for Groupe ADP (Paris airports) if the French government decides on full privatisation. Vinci already owns stakes in 35 airports worldwide. Transurban was also down 4 per cent. There are concerns that its major tunnel project in Melbourne may be delayed, since this requires a vote by the state of Victoria and there is currently a lack of political consensus.
Diversified infrastructure is the strategy’s second largest allocation (16 per cent of the portfolio) and lost 2 per cent during the month. CK Hutchison Holdings lost 3.5 per cent in advance of its release of Q2 earnings on fears that currency headwinds (principally GBP/HKD) will pose a challenge, while 3i Infrastructure plc dropped 4 per cent. However, 2Q income was in line with expectations, and 58 per cent ahead of the prior year. Its balance sheet remains healthy with significant capacity for additional investments.
In the Rail and bus sector, the stand-out performer has been Kansas City Southern, up 10 per cent. Investors are reassessing the prospects of its refined products business and cross-border (US / Mexico) intermodal freight, both of which represents considerable upside. EBIT and EPS growth are now likely to surpass KSU’s US peers, whilst its PE ratio is one point behind the peers.
Social infrastructure company, HICL Infrastructure, was down 6 per cent for the month after raising GBP 267m in new equity. We participated in this issue. HICL remains on track to achieve its IRR target of 7-8 per cent this year, and we expect it to increase its dividend, yet again, by 2.5 per cent this year.
Cable company Comcast lost 6.6 per cent on news that, together with Charter Communications, it might take a stake in Sprint Corp. Although a possible outright acquisition might be a possibility, it more probable that these firms would invest in exchange for favourable terms to offer wireless services.
The Infrastructure strategy outperformed European stocks (down 3.2 per cent) over the reporting period, but underperformed the broad equity indexes. Real asset funds as a group were down 0.7 per cent for the month, and infrastructure securities funds were down 0.6 per cent.
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