Fund Manager Q&A – Gravis Capital Management

How do we select the funds for your investments and what due diligence process is involved?

Gravis Capital Management (GCM) is a fund on our ‘watch list’ and, as part of a bigger ESG (environment, social, governance) movement being seen across the fund industry, it’s a good example of some of the diligence we carry out at Fiducia. Even if this fund doesn’t end up in our portfolios, we feel it’s a good example of the options out there and the consideration we give to shifting market priorities and investors’ values.

We like to post a periodical Fund Manager Q&A in an effort to give a little insight into the processes involved in investment management, to throw some light on what concerns or interests you may or may not have.

This month, we explore the discussion point of ‘alternative’ funds, using Gravis Capital Management (GCM) as an illustration of the options out there:

FWM: Are Clean Energy and Infrastructure investments still ‘alternatives’ or are they now a mainstream investment option for retail investors?

GCM: Infrastructure is increasingly viewed as a separate, stand-alone asset class within client portfolios. The cashflows are predictable – being fixed, long-dated with upward only inflation links, or derived from highly regulated asset bases where the regulatory framework allows returns based on formulae that again change only occasionally and predictably.

Exposure to a broad range of underlying projects is provided within the investible securities in the sector, creating highly diversified and well-balanced portfolios when a combination of these entities is aggregated.

In comparison with equity investing, infrastructure investments are in aggregate higher-yielding – effectively compensating investors for the lack of a stronger dimension of capital growth. Infrastructure assets naturally display a lower level of price volatility than equity investments and, as such, infrastructure investing is considered a ‘defensive’ asset class that will provide a steady return throughout economic cycles, with prices having a low correlation to equity markets.

In comparison with bond investing, meanwhile, infrastructure assets will perform positively in an inflationary environment whereas bonds and bond funds will do poorly – with the exception of very low-yielding floating rate or inflation linked securities – given that market interest rates are highly linked to inflation and bond prices fall as interest rates rise. It should also be noted that at present – due in large part to QE programmes – bond yields are well below infrastructure yields for equivalent risk.

This compelling combination of income, low volatility and upward-only inflation linkage means infrastructure investing is strongly differentiated from equity and bond asset classes and warrants an increasingly important allocation within a balanced portfolio.

The UK’s listed closed ended infrastructure sector has more than doubled since January 2016 to c.£27bn

Record inflows of c.$85bn in 2018 into infrastructure funds globally.

UK Retail investors can access Infrastructure via both UK / Global managed UCITS OEICS, Investment Trust Companies and direct equities.

FWM: Is it better to set up an investment trust to manage liquidity and the underlying vehicles or not?

Infrastructure assets are physical assets which can’t be sold at a touch of a button and indeed it can take months to find a buyer of such assets. Thus, Investment trusts are viewed as superior vehicles for illiquid assets because investors wanting their money back can sell their shares, rather than the funds having to dump their holdings in depressed markets.

If you look at private unlisted infrastructure partnership funds, they typically average management fees of 1.5 – 2.0%, this is traditionally on assets invested but can occasionally be on total AUM. On top of this managers charge performance fees, the typical 20% carry above a hurdle, recent trends in the industry have seen hurdle rates come down from the standard 8%, with Blackstone’s $40bn infrastructure fund settling on a 6% hurdle rate. This means that for any returns above 6% net IRR the fund manager receives 20% of the upside. Whilst UK Closed Ended Infrastructure funds fees AMC/OCF are typically circa 1%. Our research has concluded the UK Closed Ended Infrastructure funds are an incredibly efficient deployer of capital vs institutional global unlisted infrastructure funds. 

FWM: What are the advantages of Infrastructure / Clean Energy Utility Investment

GCM: There are four specific advantages associated with the asset class;

1. Strong Barriers to Entry
2. Resilience to the economic cycle
3. Inflation Protection
4. Income generation

Strong barriers to entry – Tend to require significant initial investment where it is often not economically feasible to construct a competing facility.

Resilience to the economic cycle – The provision of vital services means their usage remains relatively stable during economic downturns.

Inflation protection – social infrastructure produces revenues that are more closely linked to inflation than economic growth as long term contractual payments typically include inflation provision.  In terms of economic infrastructure flexible end user pricing ensures adequate inflation protection.

Income Generation – infrastructure assets tend to be cash generative and hence can produce regular income distributions.

The combination of the above factors ensures infrastructure is viewed as an asset class in its own right.  Furthermore, infrastructure assets are typically valued by discounting future cash flows and are therefore less susceptible to stock market movements.

FWM: What distinguishes infrastructure from more traditional equity or debt investments?

GCM: Infrastructure assets display several characteristics that distinguish them from more traditional equity or debt investments.

1. The assets tend to be single purpose in nature, such as a gas pipeline, toll road or hospital.
2. The private investors’ participation in the asset is typically for a finite period. This is a function of the agreement the investor has made with the governmental authority and is often a reflection of the natural lifespan of the asset. For instance, toll roads are generally handed back to the government after a pre-defined period (the end of the concession).
3. In either case, infrastructure assets are characterised by their long duration. Therefore, the capital invested in such projects is often referred to as patient capital; in that the initial development involves high upfront capital costs with payback occurring over the life of the asset.
4. Finally, one of the key characteristics of infrastructure assets, and what can make them particularly attractive as investments, is that they tend to be, or exhibit the characteristics of, natural monopolies.

If you feel that investment management or any kind of financial advice might benefit you and your family, then do please give us a call. We would be happy to arrange a free, initial consultation with one of our trusted advisers to discuss your personal circumstances in confidence.