Global infrastructure funds are becoming increasingly visible on Wall Street, not only to major institutional investors, but also to financial advisors across the U.S.
Infrastructure funds invest in companies that own, operate, build and service infrastructure assets, such as roads, bridges and utilities.
In a recent interview, Prudential Jennison Global Infrastructure Fund managers Bobby Edemeka and Brannon P. Cook discussed how the fund may be appropriate for a broader range of investors, seeking both income and price appreciation potential.
How do you define the investable landscape for the Prudential Jennison Global Infrastructure Fund?
Edemeka: We have four core areas of infrastructure in which we invest: energy, utilities (including water), transportation and telecommunications.
Investors tend to be drawn to infrastructure investing for the defensive characteristics of the asset class. For us, while we definitely embrace the defensive characteristics of the asset class, we are more focused on the organic growth aspects of infrastructure.
If you can identify secular trends, the compounding effect really can take hold and could benefit fund investors over the long run.
How does the Prudential Jennison Infrastructure Fund provide access to infrastructure investments differently than what traditionally has been used?
Edemeka: Basically, infrastructure investing for institutions has historically been through private equity funds; it has a track record and firms are used to it. What is unique for our fund, versus the traditional private equity model, is that we get transparency through the public equity markets.
Cook: Two characteristics of valuation transparency in infrastructure markets are minute-by-minute transparency, and greater liquidity in public markets. We embrace both of those differences. That transparency helps us identify pricing and pricing imbalances in the market that we can capitalize on.
Liquidity distribution also allows for more dynamic investment management. It allows us to be more nimble, to get out in front of changes in the industry landscape, and to react more quickly than we can with a private equity deal. Those are important distinctions.
What does your research process look like? Can you also discuss your approach to bottom-up research?
Edemeka: We want to assess the broad universe of infrastructure, and to do that, you need a broad team with expertise across different areas. We bring that expertise to the research process, meeting with companies we may eventually invest in, and meeting with their customers, suppliers, competitors and legislators.
Cook: We are regularly meeting with major global infrastructure companies—with different people, companies, sell-side consultants and government officials—on a regular basis. We believe that you really need to be on the ground to capitalize on the best opportunities.
For us, having public equity experience is important in that regard, because at the end of the day, the market is not 100 percent efficient all the time. There are myriad price shifts, so experienced investment professionals, like the ones we have on our team, can ascertain when the market is overdoing it in one direction or the other.
What are you looking for in the companies you’re investing in when developing the Prudential Jennison Global Infrastructure portfolio?
Cook: Globally, we’re seeing this big trend toward urbanization and all that comes with it. There's a growing middle class, an urgent demand for electricity, transport, telecom and water. We’re seeing all of these things come together as opportunities for the fund.
Many times, the companies we invest in have a specific portfolio of services assets across several regions, so we want to focus on certain regions and companies that are tied into those all-encompassing trends.
Edemeka: Additionally, the chief value of companies we invest in tends to be cash flow generation. Currently, the existing state of cash flow generation is not growing significantly, but overall, it provides a nice stable base for our fund.
On the other end of the spectrum, we are seeing greenfield -related projects (projects that are not generating cash flow today, but the growth potential of those assets are very significant). In between, you have brownfield project options (basically companies or assets that exist today and are generating some cash flow growth)—so it’s really a mix.
We think that mix benefits our investors, as you have some level of dependable stability, but you also have an opportunity for future growth.
Cook: We also have exposure to emerging markets, which have faster growth and a greater need for capital infrastructure where the governments are more involved in the infrastructure process.
That can lead to more regulatory activity and can also be more cyclical on the upside and downside. We look for growth in markets that we are comfortable with, and we look for steady growth and monopoly-like characteristics.
Can you point to any “hot spots” of global infrastructure opportunity?
Edemeka: China has made strides in industrial productivity—it’s the second largest economy in the world and faces tremendous infrastructure needs. They really have needs everywhere, although the underbelly of that situation is a massive pollution problem.
Consequently, they are now repositioning the electrical supply grid, which has been relying exclusively on coal. China still uses coal, but is increasingly turning to clean energy, with wind, solar and nuclear. They’re now focused on the problem, and that’s an opportunity for infrastructure investors.
A lot of investment dollars are needed to fix the problem. Nuclear generators need to be built, along with rooftop solar and wind farms, and investments in wastewater treatment plants and power grids need to be made. Again, opportunity is very deep in China—as in any infrastructure market, the bigger the problem, the bigger the opportunity.
How are you approaching the urbanization megatrend?
Cook: It depends on where you’re looking. For example, in Sao Paulo, Brazil, there are several companies you can analyze. The questions are the same: Do we like what the firm is doing, do we like the projects, and do we like the progress being made? If so, we pull back and look at the macro-picture in that country.
We tend to favor projects with better rates of growth. Consider Mexico City, where, as opposed to other areas in Mexico, growth and volume is more pervasive. By and large, massive urban centers have the biggest growth potential—think of Paris, and its major airport, which is a good example of leveraging an urban center where everyone wants to go, as opposed to visiting a third-tier city.
Here’s another example: In China, its building of high-speed rail is tremendous, and the scale is unprecedented. So we look at firms there making high-speed trains. That’s a trend we have been following across eastern China as it has been urbanizing.
Even here in the U.S., there have been tight public spending rates, but we are seeing creativity across the board on infrastructure projects. We have also invested in Ferrovial, a Spanish construction company that owns a bunch of assets, including Heathrow Airport in London and a Canadian toll road. They can use dynamic pricing on certain roads to ensure that traffic never stops on roadway and toll way projects. That’s a good example of creativity.
Also, we are following new roadways outside of Washington, D.C., and outside of Atlanta, Georgia—these are areas of interest for us in the transport infrastructure sector.
It seems anti-pollution and sustainable energy are byproducts of the urbanization mega-trend. How does this impact your investment decisions?
Edemeka: We do see value in green-based opportunities, although it’s not driven by any ideological perspective.
That said, we are interested in the potential runway for growth in green infrastructure. Just about every country has some sort of target to increase the supply mix coming from renewable sources.
Additionally, there’s great demand for low penetration rates, so there’s the possibility for big secular growth opportunities with renewables that fit our portfolio model. For example, NextEra Energy is the largest developer of renewable power here in the U.S.
There are other factors at play as well. For instance, growth in renewable investment is leading to more wind farms and more solar, which are renewable sources rolling out with intermittent power. Correspondingly, nuclear plants and electric utilities run all the time. That’s not so with grids on solar, which only work when the sun is out.
Intermittent power is coming, so governments need to modernize the grid. That’s a good investment opportunity in our opinion.
Look at California, which is further along the curve of renewable power and further along the curve of better managing and modernizing those power grids.
Edison International, also in our top ten April 2015 holdings, manages the grid of all major suburbs of L.A., doing the heavy lifting on grid investments, and we see that as a good opportunity.
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The Prudential Jennison Global Infrastructure Fund offers investors the opportunity to capitalize on the global need to replace ailing infrastructure in developed markets, in a market estimated to be valued at $50* trillion in infrastructure by 2030. Infrastructure offers investors the opportunity to benefit from burgeoning industry trends, while potentially providing attractive risk-adjusted returns and a hedge against inflation and rising rates.
Whether it's urban revitalization, infrastructure, the rise of the emerging market consumer class or industrialized agriculture, Prudential Investment Management can help institutional investors uncover the unprecedented opportunities the urbanization megatrend offers.
The views expressed herein are those of Jennison Associates LLC (“Jennison”) investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. This material does not purport any legal, tax, or accounting advice.
The stocks discussed should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in the portfolio at the time this interview was conducted or that securities sold have not been repurchased. The securities discussed do not represent the entire portfolio and in the aggregate may represent only a small percentage of the portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.
* Source: McKinsey Global Institute; A.T. Kearney; PwC; CCAFS