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A flying start for the Infrastructure fund

06 January 2020
Infrastructure ensures that the world functions. Ships unload their cargo in ports. Lorries transfer the cargo to its destination by road. Recipients are notified that their orders are on their way via data networks. Communication equipment is powered by electricity generated by wind and solar farms.

Dynamic sector
‘You create infrastructure to last decades,’ Thomas van der Meij says. ‘Yet the sector is highly dynamic. All kinds of things are changing. Major trends that affect infrastructure include urbanisation,  globalisation, digitization and sustainability. These trends are changing the requirements infrastructure needs to meet.’ For instance, digitisation has led to greater demand for data centres, communicationtowers and satellites. With a view to sustainability, we’re increasingly moving towards renewables to generate electricity. Some countries are using nuclear energy to manage CO2 emissions. Globalisation demands new methods of transport; the hyperloop might just be put to use one day.

High barriers
‘Infrastructure has a number of specific characteristics that make it an interesting investment,’ Jags Walia continues. ‘It often involves companies with a monopoly that have concessions lasting decades. The entry barriers are high. Few new players manage to enter the market. Moreover, equities in these companies are much less volatile than those in other companies.’

‘These are companies with a long-term view,’ Van der Meij adds. ‘They have predictable cashflows and their income is usually inflation-proof. They have hedged that risk in their contracts by ensuring that their rates can rise in line with inflation.’ If you look at the index, performance of listed infrastructure companies evolves steadily and is less affected by economic cycles. The benchmark, the FTSE Core Global Infrastructure 50/50, has risen by an average of 6 percent above US inflation each year since 2008. ‘There is a positive risk/return ratio,’ Van der Meij confirms. ‘We have calculated with a mean-variance tension test that portfolio returns could have been 2.5 to 3.5 percentage points higher per year if listed infrastructure was added to an investment portfolio.'

Tactical return
Tactical return can also be earned on top of structural return. ‘Investors’ over-reactions to news can sometimes cause prices to drop too far,’ Walia says. ‘The equities then become cheaper than their fundamental valuations. That’s the best time to invest or to increase holdings, if you believe the equity price will recover at a later date. That’s what happened with France’s Vinci and Japan’s Kansai Electric Power Company.’ (See the parts yellow vests and better safe than sorry) 
When analysing companies, the fund managers can profit from the expertise that Kempen has accrued over the past few years. ‘Our modus operandi is data-driven,’ Van der Meij explains. ‘Out of about 500 eligible companies, we analyse approximately 200 in detail. In doing so, we examine all the available information on the company. With respect to value, but also less tangible aspects, such as the quality of the management. We subsequently select 20 to 40 companies for our portfolio.’ ESG criteria (environmental, social & governance) criteria naturally weigh heavily in the selection process. ‘This applies to all of Kempen’s investments and therefore also to our fund. As an example, we are considering investing in a company at the moment. We have discussed ESG issues in detail with the management, but are awaiting evidence of progress before we proceed further. We have also been in touch with Greenpeace, for instance, so that we can analyse specific issues from all angles and in doing so obtain a complete picture.'

Excluding macro-risks
The Kempen (Lux) Global Listed Infrastructure Fund invests in a ‘cluster neutral’ manner versus its benchmark. This means that the weight in the portfolio of e.g. investments in the US is the same size as that of the benchmark. ‘This is how we exclude macro-risks,’ Walia says. ‘Within those geographical markets we then seek the best stocks using our valuation models.’ This approach certainly seems to work. Over the first six months of 2019, the fund posted a return of 20.8 percent, while the return on the FTSE Global Core Infrastructure 50/50 index stood at 18.2 percent. ‘We’ve only just started,’ Van der Meij puts this in perspective, ‘but the initial results are great. Now we need to concentrate on holding on to those over the next few years and building a solid track record.’ According to the fund managers, the Kempen (Lux) Global Listed Infrastructure Fund could be an excellent addition to the portfolios of long-term investors. Of course investors should consider if this fund will eventually fit their portfolio. It offers a sound return versus the risk and the equities are less vulnerable than other equities. ‘Equity prices fell by an average of five percent in May on trade war concerns,’ Walia says, ‘while our fund climbed by 0.5 percent in the same period.’

Among other activities, Vinci is a major toll road operator in France. At the end of 2018, the company faced blockades by the ‘yellow vests’ protesting against President Macron’s government policies. Investors saw the company’s income fall as motorists avoided the toll roads. They sold their equities and the price of Vinci dropped substantially. ‘In fundamental terms there was nothing wrong with the company,’ Thomas van der Meij says. ‘The blockades were merely a hiccup in operations over decades. For us, this was the right time to invest. The yellow vest protests are now pretty well over and the equity price has recovered completely, in fact it’s higher than before the protests.’

In April this year, Kansai Electric Power Company announced that its new nuclear power plant was to enter into operation a year later than planned. More time is needed to comply with safety requirements. This prompted investors to sell their equities en masse. The price plummeted by nearly 8 percent in a single day and as much as 20 percent overall. ‘In the long term, it makes little difference that the power plant will generate electricity a year later,’ Jags Walia claims. ‘You could reason that the delay is positive if it yields a safer power plant that will suffer fewer disruptions to power supplies in future. To us, this news was a reason to buy more equities rather than to flee.’ This article was written in July of 2019. Are you curious about the most recent numbers? Click here

Kempen (Lux) Global Listed Infrastructure Fund (the “Sub-fund”) is a Sub-fund of Kempen International Funds SICAV (the “Fund”), domiciled in Luxembourg. This Fund is authorised in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Kempen Capital Management N.V. (KCM) is the management company of the Fund. Kempen is authorised as management company and regulated by The Netherlands Authority for the Financial Markets. The Sub-Fund is registered under the license of the Fund at The Netherlands Authority for the Financial Markets. The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document and the prospectus. These documents as well as annual report, semi-annual report and the articles of incorporation of the Fund are available free of charge at the registered office of the Fund located at 6H, route de Trèves, L-2633 Senningerberg,Luxembourg and on the website of Kempen ( The Sub-Fund is registered for offering in a limited number of countries. The countries where the Sub-Fund is registered can be found on the website. The value of your investment may fluctuate. Past performance provides no guarantee for the future.

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Thomas van der Meij
Jags Walia
Todor Ristov

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