Creating a universe

17 May 2019

The Winner of the Money Management Infrastructure Securities award, Magellan Infrastructure Fund, relies on a strong quality bias to screen out stocks that don’t fit their investment universe.

Ofer Karliner, Portfolio Manager for Magellan Infrastructure Fund, said securities that met Magellan’s proprietary infrastructure classification criteria were included in what is known as their investable universe.

“During the year there are times when qualities were in and out of favour, through the year through quite long periods of actually protecting capital and that’s one of our key investment objectives so we’re quite happy with that.”

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To meet that definition, its underlying business provided a service that is essential to the efficient functioning of a community, but had also generated cash flows not subject to external risks.

Karliner used a two-step process to screen out options that add too much risk to the portfolio.

“We take out things that have too much exposure to commodity price risks or competition. You end up with a very defensive portfolio, that’s step one,” Karliner said.

“Step two, is from that universe we’ve got some great research the team has done to help us identify some really good opportunities and avoid the blow ups in the sector, that’s led to some great performance though the year.”

Gearing levels, sovereign risk, regulatory risk and reporting transparency were other criteria used to evaluate the appropriateness of the security.

Each security undergoes detailed analysis of the company’s external environment, its business specific issues, it’s historical financial performance and valuation.

“Quality is first and foremost something we look at, stability of cash flows,” Karliner said.

“We spend a lot of time doing a lot of research on the stock and identifying any other risk factors around that quality definition and also to come to a view on value.”

“We now apply a number of risk factors to try and recognise we can’t capture all the risks in the discounted cash flow (DCF) model.

“It’s obvious we have a very concentrated portfolio so it’s very important for us avoiding a downside risk, so protecting capital in down markets.”

For Magellan, it’s not just about picking the winners, but also avoiding the losers and they are adamant they had done a good job.

“We screen our companies and exclude companies where we see the range of outcomes has been very large,” Karliner said.

Finalist Colonial First State Global Listed Infrastructure Securities Fund’s success came from a belief in investing in long-dated assets, which required a long-term perspective.

The assets invested in by finalist RARE Emerging Markets fund are infrastructure utility assets that are regulated or with long-term concessions, because of that they have quite predictable cash flows.

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