Speaking to InvestorDaily, Magellan head of infrastructure investments Gerald Stack said his global listed infrastructure fund looks to invest in companies that are monopolistic in nature, display price inelasticity and have stable, predictable cash flows.
"Provided you’re willing to be boring and to stick to reliable income streams and be comfortable with that, you should be able to achieve very reliable returns on any given three-year timeframe all the time," Mr Stack said.
Pricing entry is important too, he acknowledged – it is important to find listed infrastructure companies that are "reasonable or cheap".
"Clearly, if the market implodes you will get hit by that. But over a three- to five-year timeframe it’s pretty hard not to deliver five to six real returns. With two to three per cent inflation that's about an eight per cent total return, nominal," Mr Stack said.
Magellan is careful to screen out factors that will make make returns unreliable, such as commodity prices, competition and sovereign risk, Mr Stack said.
"Sovereign risk is the easiest one: there are no Chinese companies [in our universe]," he said.
"Where there is a sovereign risk, from time to time the government will play with your concession rights as an investor – and you have no recompense in law."
By the same token, countries like Russia and Venezuela are off the table – but Magellan is willing to consider some assets in Brazil, given the more reliable court system in that country.
In order to screen out commodity price fluctuations, Magellan avoids energy generation companies in favour of the distribution end of the chain.
"Transmission and distribution companies – they’re regulated. They have a very stable return, in good times or bad. So we don’t want to be in generation."
Magellan also avoids "contestable" markets like retail energy suppliers, Mr Stack said.
"We want monopolies providing essential services. With a monopoly providing essential services, you’ve got very low price inelasticity, if any.
"Wherever we see regulation, by and large it means that’s an asset we want to be in. Regulation is a sign of market power. That means very reliable returns over time – and that’s what we’re seeking to deliver to investors," Mr Stack said.
