In an ageing and debt-heavy world, these assets should outperform

What are investors looking for? When you get down to it, we want high returns (growth), for the lowest risk possible (stability), and at the right price (value).

That’s the holy trinity and whilst there is always compromise along those dimensions, if an investment appropriately ticks these boxes, it’s usually worthy of a spot in a portfolio.

Susanta Mazumdar, founder and portfolio manager for the Tribeca Asia Infrastructure Fund (TAIF), argues that Asian infrastructure ticks all of these boxes – particularly when compared to the US and European counterparts.

Asia Pacific [infrastructure] stands out because not only are there higher growth names especially in emerging economies like India and China, but there are also a sizeable number of stable infrastructure players with developed market-style governance and management that we trust over many years of familiarity.

Yet, valuations are often attractive relative to history and the rest of the world. The valuation discount gap is higher for public versus private infrastructure in the Asia Pacific.

In the following Q&A, Mazumdar further outlines the opportunities in Asian infrastructure, Tribeca's approach to life-cycle investing, some of the major projects the fund is invested in , and a local opportunity that stacks up. 

Can you briefly explain your role in the Tribeca Asia Infrastructure Strategy and the investment philosophy that underpins it?

I am the Founder and Portfolio Manager for Tribeca Asia Infrastructure Fund (TAIF). TAIF is the only infrastructure fund specialising in the listed space in the Asia Pacific region, which has a large liquid addressable market. 

In contrast, the private infrastructure sector in the region continues to see significant new capital resulting in, what we believe to be, excessive valuations. Our fund is poised for growth, having secured a sizeable anchor investment from an Asian Sovereign Wealth Fund in August 2023.

We are absolute return long-only investors in a concentrated portfolio of up to 30 listed infrastructure stocks. Our portfolio is balanced between developed and emerging markets and between the main geographies of Australia, New Zealand, China, India, and ASEAN. We focus on quality, sustainable growth, dividend and ESG.

Why Asia Pacific specifically, how does it stand out from the rest of the world? (e.g., is it a richer environment for infrastructure because of its development profile)

When we compare infrastructure stocks in Asia Pacific with Europe and the US, we find that European stocks have the lowest growth profile, but many European countries also possess emerging market-like regulatory risk due to their populist political leanings. 

US companies have low regulatory/contractual risk and higher growth but typically come with high valuations, particularly for large-cap names with strong governance.

Asia Pacific stands out because not only are there higher growth names especially in emerging economies like India and China, but there are also a sizeable number of stable infrastructure players with DM-style governance and management that we trust over many years of familiarity. Yet, valuations are often attractive relative to history and the rest of the world. The valuation discount gap is higher for public versus private infrastructure in the Asia Pacific.

Infrastructure can be broken down, broadly speaking, into emerging and mature. Where on that spectrum do you typically invest and why?

In general, we invest in companies that are in the “harvesting” stage - that is, free cash flow positive with lower leverage. 

In the current interest-rate environment of higher-for-longer, we believe the risk-reward is less attractive for greenfield or ramp-up stage companies, which typically have higher execution risk and leverage. 

In our region, many “harvesting” stage companies provide both attractive capital growth and dividend yield.

What are some of the key themes that you are focusing on at the moment, and how is this being reflected in the portfolio currently?

We invest around five secular themes, which have roughly equal weight in our portfolio today:

• Ageing demographics
• Environment awareness / Energy transition
• Aspiring middle class
• Digitalisation of Asia
• Interconnected Asia / mobility

When people think of infrastructure, what comes first to mind are core infrastructure assets such as roads, airports, seaports, gas pipelines, power plants, and water treatment facilities. 

These days, infrastructure also encompasses core-plus assets such as data centres, hospitals, and retirement villages. These types of social infrastructure have a little more economic variability, but often stronger growth prospects.

What are some of the major projects/assets that the fund is invested in right now?

Our portfolio is a diverse mix of quality infrastructure stocks, including:

• Gateway airports in China and New Zealand
• Waste management companies in Australia and North Asia
• Telco tower owners in ASEAN
• Healthcare and retirement village players in India, ASEAN, Australia, and New Zealand
• Regional data centre players
• Gas utilities across the Asia Pacific
• Geothermal and renewable asset owner

Core infrastructure has long been prized for its predictable cash flows and natural hedge against inflation. 

In general, infrastructure is a less volatile way to invest in key structural growth trends in the region. 

In our ageing and debt-heavy world, nominal GDP growth might come under pressure but infrastructure assets have less economic sensitivity and should outperform.

In the past, investors could access infrastructure mainly through private/direct investment. Unfortunately, this is increasingly challenging with private asset valuations growing to high multiples. There is now a significant valuation gap between listed and private infrastructure, despite comparable long-term returns. Moreover, quality assets in private space are often out of reach for individual investors.

Other major benefits of listed infrastructure are liquidity (allowing investors to manage their cash flow needs) and lower operating costs versus comparable private assets.

Are there any companies within Australia that you are finding particularly compelling at the moment? If so, what companies and why?

An owner-operator of 15,000km of gas pipelines, APA Group (ASX: APA) plays a vital role in Australia’s decarbonisation by enabling coal usage reduction across the country. It is one of only eight companies on ASX that has been able to grow or maintain dividends over the past 12 years. 

In August 2023, APA announced a meaningful A$1.17 billion acquisition of Alinta Energy to grow the core gas utility B2B business and renewables pipeline, accompanied by an institutional placement. Current stock valuation – +7% dividend yield, 8x P/CF – is particularly compelling.

We believe that energy transition is a multi-decade process and that gas will play an important role as transition fuel during this period.

Cleanaway Waste Management (ASX: CWY) is a waste management and recycling solutions provider, and an emerging Waste to Energy power player. It has a large, sticky customer base and long-term contracts with customers who will stay with vendors that can ensure compliance. 

In the long term, this company will benefit from Australian regulators’ drive to increase recycling and waste incineration from 10% to 30%, in line with other developed economies. Post higher costs and disruptions caused by COVID-19, Cleanaway is slated to recover earnings healthily in FY24, growing net profit by more than 30%.

What sort of returns are you targeting and how consistent has the performance been over time?

We target an 8-12% p.a. un-levered USD return, including a 3-4% dividend yield.

TAIF generated ~10% USD return CAGR in two periods: Nov 2017 to Dec 2019, and Jan 2020 to Dec 2021. Following the start of Federal Reserve rate hikes, our returns were negatively impacted. 

In 2022, a tough year for markets, half of our fund’s decline was due to Asia Pacific currency weakness. This means that our local currency return gross of fees was down only a high single-digit percentage for the year.

Life-to-date (November 2017 to September 2023), our fund performance has meaningfully outperformed MSCI Asia Pacific ex-Japan and MSCI World Infrastructure Index.

A lot of investors see infrastructure as a safe haven when it comes to combatting the macro instability we are currently seeing in markets. Is that still the case or have those characteristics changed?

We agree that this is certainly still the case for the infrastructure asset class as a whole. For most of the life of our fund, our portfolio had demonstrably lower beta (0.6x) and lower volatility (8-10) % compared to the market and other asset classes. 

As we mentioned, currency volatility was high and created a meaningful P&L downside in 2022. However, since Asia Pacific currencies are now at 20-year lows, and US rates may not have room to increase materially from here given the society’s indebtedness, we believe currencies should be less of a headwind for our fund performance moving forward. 

Asia's only Infrastructure fund investing in listed equities

The Tribeca Asia Infrastructure Strategy aims to earn superior, risk adjusted total returns through a mix of long-term capital appreciation and cash yield by investing in infrastructure companies across the Asia-Pacific universe using an index-unconstrained concentrated portfolio approach. Learn more