Fund manager RARE Infrastructure has added Sydney Airport to its Infrastructure Income Fund portfolio, which is designed to produce income from a wide range of global infrastructure assets.
RARE likes what it describes as Sydney Airport’s “dual-till” revenue model. Its aeronautical activities generate “stable regulated pricing”, while it also generates unregulated revenue from non-aeronautical activities such as retail outlets in the airport terminals.
RARE believes the business is benefiting from a long-term shift to higher value international passengers, including the high-growth, big-spending Asian passenger market.
And it says the company produces significant free cash flow, resulting in an attractive dividend yield.
Sydney Airport has been a strong performer on the ASX over the past few years. In early 2012 its stock was trading at around $2.60 a share and then it started a steady climb to a peak of $7.41 in August 2016. Since then it has traded in a range between $6 and $7.50 and is currently around $7.70. It pays a dividend yield of around 5 per cent.
The RARE Infrastructure Income Fund has had a strong start to the year, with a return of 14.7 per cent for the three months to the end of March, net of fees, and 24.1 per cent for the 12 months to the end of March.
The income component was 7.5 per cent over the 12 months to March. Since the fund started in 2008 it has paid average income of 8.8 per cent a year and produced average growth of 2.8 per cent a year.
Its portfolio of energy, gas, water, toll road and other global infrastructure stocks has outpaced the recovery in the overall global equity market this year, as investors have favoured strong cash flow generating businesses.
The fund benchmark is the OECD G7 Inflation Index plus 5.5 per cent, which was up 7.2 per cent over the 12 months. The S&P Global Infrastructure Index was up 16.8 per cent over the same period.
Shane Hurst, RARE senior investment analyst and portfolio manager – value and income strategies, says infrastructure generally offers lower volatility, stable cash flow, inflation protection and diversification.
“Infrastructure companies provide predictable income distributions due to stable earnings derived from the underlying asset. Regulation and/or long-term contracts provide stable cash flow and greater capital stability,” Hurst says.
Other Australian holdings in the portfolio include toll toad operator Transurban and energy network operator Spark Infrastructure.
North America was the biggest contributor to performance during the March quarter, led by the US gas company Williams Co and the Canadian gas company Enbridge. Williams owns and operates natural gas pipelines and associated assets. Enbridge owns and operates one of the largest oil and gas pipeline networks in North America.
The fund initiated positions in several other companies during the quarter, including Portuguese electricity company Energias de Portugal, Chinese toll road operator Shenzhen Expressway and a US electric company Clearway Energy.
The fund realised some gains, exiting US electric company Duke Energy, US gas company Kinder Morgan, Canadian gas company Gibson Energy and Brazilian electric company CTEEP.
The fund has 37 per cent of its holdings in the United States and Canada, 28 percent in Europe and 17 per cent in Asia Pacific developed markets. Its biggest exposures are to electricity markets (50 per cent of the portfolio), gas (17 per cent) toll roads (12 per cent) and water (7 per cent).