Q.Why do you think investors should include the infrastructure theme in their portfolios?
A. Infrastructure can offer investors a highly attractive set of investment characteristics delivering inflation protection and lower risk of capital loss relative to other general listed equity investments. However, Infrastructure as a “generic” term can also offer investors wide ranging investment characteristics and risks depending upon a number of factors. For example, investing at the outset in the construction of new projects in countries with high political risk is not necessarily a low risk option.
Lazard recognise this and focus their research on a very specific subset of the Infrastructure universe, to seek out infrastructure assets which display longevity of assets, lower risk of capital loss and inflation-linked returns. We have called this “preferred” infrastructure and our product only invests in assets that meet this paradigm.
Q.What does the Lazard fund do differently to other infrastructure funds?
A. Lazard has a number of competitive advantages. These include deep experience, disciplined research and robust risk management driven by our investment philosophy and a unique risk return profile. We believe our fundamental long-term analysis of companies also gives us an edge. Our analysts are experienced and disciplined in their approach to company valuations, which are based on our assessment of companies’ value over an assumed holding period, typically three years. The analysts use consistent inputs across the investable universe, and focus on using assumptions, which generate consistent results between the three alternative valuation methodologies.
Q. What areas of the fund have been most successful over the past year?
A. The team has been particularly active in identifying preferred infrastructure assets in Europe. Such stocks came under significant pressure post crisis, from investors who generally reduced allocations to Europe. As stock prices fell and earnings remained stable the process deployed by the Lazard team enabled them to exploit this market inefficiency and deliver returns for investors particularly around Toll Roads (especially in Italy), and various European Airports.
Q. What economic or market factors is the fund most sensitive to?
A. As we only invest in Preferred Infrastructure, we believe the strategy is more likely to deliver investment performance that is inflation-linked. However, we have a valuation approach to investing, which may give rise to variations of performance within the context of the movements of the infrastructure universe. That is, our process will tend to outperform during stable and declining markets, keep pace during rising markets, but may lag during bull markets as market prices become irrational, departing significantly from true or fundamental value.
Q. How do you see the fund and sector performing over the next 12 months?
A. By their very nature many Infrastructure assets have offered significant appeal in recent years at a time when market volatility and economic uncertainty has weighed heavily on investors’ minds. We believe the opportunities lie very much in Europe and Japan, whereas in the United States and Canada record-low interest rates have significantly lowered expected returns. Infrastructure is not an asset class in which it is possible to park money in an index and expect to receive appropriate risk-adjusted returns. We believe there are significant opportunities and significant risks associated with infrastructure stocks, and it will take a skilled and disciplined manager to navigate through them.