Infrastructure investing beyond roads, rail, utilities

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<p>Glenn Freeman: In this edition of "How I invest your money?" I'm talking with Jim Lydotes from BNY Investment Management about the process that he and his team use in selecting stocks, particularly within the infrastructure space.</p> <p>Jim Lydotes: I think traditionally the way people have looked at infrastructure is in a very concentrated way and we think infrastructure as an asset class is actually a lot broader than as been traditionally defined.</p> <p>So, historically, people have been attracted to the asset class because they are looking for three things. They are looking for stable cash flows, regulatory predictability and finally, businesses are asset owners or rent collectors. Those have been the assets or the attributes of that class that have attracted folks to the space. But historically, they have looked to get that exposure through economic infrastructure, so things like energy infrastructure or toll roads or regulated utilities. We have always believed that you can get those same attributes from a much broader segment of the market and includes areas such as social infrastructure. So, aged living facilities or hospital assets or even telecom.</p> <p>So, we have always expanded our universe of investable stocks within the infrastructure space and by doing that you could have a universe of stocks to sub-select from that's literally about 6.5 times as large as your traditional manager in the space. I think you can still adhere to, again, those characteristics for why people are attracted to the space but in a much broader segment of the market. And what that allows you to do is be more discerning in the prices that you are paying for the assets that you are buying in the space.</p> <p>Freeman: And equities are generally regarded as quite expensive at the moment. What's your take on this?</p> <p>Lydotes: Yeah. So, I think, it goes back to that expanded opportunity set. So, if you are looking at the traditionally-defined economic infrastructure segment of the market, which is about 75 stocks, very concentrated list of securities, we have seen a lot of money come into global listed infrastructure as an asset class over the last 10 years. That has pushed the valuations of those traditional 75 stocks up to less attractive levels in our mind.</p> <p>But since we take a much broader view of what infrastructure is and we have that universe of about 500 stocks that we can sub-select from, there is a good deal of value able to be found in very specific segments of the broader infrastructure space at this point in time. So, there's a couple of key areas that we are focused on today where we are continuing to find a good deal of value. And again, I think, it goes back to that broader opportunity set. When you have an opportunity set that large, you can selectively find well-priced assets at all points in time.</p> <p>Freeman: Now, Jim, you are an internationally-focused manager. North America forms one area of focus, but what about other markets that you are interested in?</p> <p>Lydotes: It's a global equity mandate. So, we really go where we find the best value at a bottoms-up stocks specific level. So, we do have some exposure in North America. We also do have a good deal of exposure to Europe. We think there is a great deal of change happening from a corporate governance perspective, specifically within European utilities. That's been happening for the last two years. So, we are finding good deal of value within that space and we are spending a lot of time down here in Australia. Unfortunately, right now, we are not finding a lot of value in some of the Australian equities that are part of our investable universe. We are always looking at those opportunities and trying to assess their value relative to the broader global equity space. But right now, we are not finding a lot value down in Australian equities.</p> <p>Freeman: And lastly, can you just talk us through a bit about your process and how you balance quantitative and qualitative research?</p> <p>Lydotes: Absolutely. So, I've been at the firm for essentially my whole career. I'm going on in my 20th year. I'm the lead manager of the strategy, but I also have a co-manager Brock Campbell who has been with the firm for 12 years, his whole co-career, and he has been within me on this fund for the entire 6.5 years that we've been managing the strategy. So, there's two people on the dedicated portfolio management team. The team is rounded out by a portfolio strategist. But behind us is a 30% strong central global research effort that we are able to leverage pretty extensively in trying to find the best individual securities, a global infrastructure space. That 30% central research department is also rounded out by a 6% quantitative research effort that we have at the firm. And so, what we do is, we leverage quantitative tools as well as that deep fundamental research effort to try to find the most well-balanced best-positioned individual global-listed infrastructure securities and build a very well-balanced portfolio.</p> <p>Freeman: Jim, thanks for your time today.</p> <p>Lydotes: Thank you very much, Glenn.</p> <p>Freeman: I'm Glenn Freeman from Morningstar. Thanks for watching.</p>

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