Ben Yearsley: Trains, boats and planes carry high equity value
Saturday 05 March 2011
Most investors are aware of the benefits of equity income funds, but how many people have thought about buying overseas equity income? Consider a fund such as First State Global Listed Infrastructure, which looks and acts like an equity income fund. Infrastructure assets could be roads, telephone lines, water supply, or even railway stations and airports. These are things that people use in their everyday lives, which means they are often essential. It can also mean they are run by companies with virtual monopolies. When you go on holiday you can choose which travel company or airline to use, but in most cases you will depart from the nearest airport.
Infrastructure holds many opportunities for investors. Companies operating these types of assets usually benefit from predictable earnings and tend to have a great degree of pricing power. This allows them to generate a high level of income so a high yield can be obtained from their shares – similar to equity income.
The manager of the First State Global Listed Infrastructure Fund, Peter Meany, favours businesses able to capitalise on a more robust outlook for global trade. He expects substantial increases in road, rail, sea and air travel and is particularly positive on businesses operating these services. Central Japan Railway is one of his largest holdings. He also has a key position in airports, with earnings, fuelled by a recovery in airport traffic.
Port operators demonstrated encouraging performance during 2010 as the global economic outlook improved and shipping volumes recovered. Mr Meany believes this should continue in 2011 with companies enjoying robust growth, and has invested in Hamburger Hafer (Port of Hamburg) and Forth Ports, which operates in Scotland and England. Other holdings that performed well during 2010 include CSX Corporation, a US rail-based freight transporter, and Vinci, a French toll-road operator.
Recently, he has added positions in Tokyo Electric Power and Beijing Enterprises, both of which have experienced weakness in their share price that he considers unjustified. Tokyo Electric Power offers low-risk cash flows and an attractive yield relative to its peers, while Beijing Enterprises will benefit from the strong consumption growth for natural gas in Beijing and North-East China.
He also favours some high-yielding stocks in the UK, including electricity and gas supplier National Grid. The share price has risen recently as investors moved into what are perceived to be defensive companies in the face of continued stock market volatility. Around 9% of the portfolio is exposed to UK-listed companies, while the largest regional weightings are in Europe and the US with around 36% and 30% respectively. Approximately 12% of the fund is invested in Japan with a further 9% in Asia.
The fund's qualities should translate into modest growth over the long term, coupled with a relatively high level yield (currently around 3%), which the manager hopes will stay ahead of inflation. The First State team are well resourced in this area and this fund makes an excellent alternative, or supplement, to an equity income portfolio.
Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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