Tactics for responsible infrastructure investment

For Lachlan Pike, a portfolio manager at Maple-Brown Abbott in Sydney, Australia, investing responsibly means doing his homework.

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“We integrate environmental, social and corporate governance considerations into each step of our [investment] process,” he says. His firm, which manages the Renaissance Global Infrastructure Fund, is a signatory of the UN’s principles for responsible investment.

Responsible investment is important in the infrastructure space, he adds, because “we are well aware of the privileged positions infrastructure assets enjoy within […] communities, and of the social licence […] to be maintained for this to continue.”

When investing in these assets, Pike’s homework focuses on assessing a company’s quality of management and corporate governance structures.

“Management mak[es] long-term capital allocation decisions, which in most cases will affect the company’s returns well after the tenure of current management has expired,” he explains. “We place particular focus on understanding things such as the appropriateness of short- and long-term incentives for management, the level of government control over the business and the composition of the board. Ideally, we also like to see both management and the board directly owning shares in the businesses in which they serve.”

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Pike also looks at other factors, including management’s expertise and track record, and minority shareholder protections.

And his homework extends beyond his desk: “We’re not afraid to directly engage with management and the board to attempt to rectify any corporate governance shortcomings we’ve identified,” he says. Even though corporate governance in the infrastructure space continues to improve, he adds, “we still see large variations when comparing corporate governance […] across different countries.”

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Companies that make the grade

For Pike and his firm, each company gets graded on its management and corporate governance. “This management score is then used as part of our process. All else being equal, we are more likely to invest in a company that exhibits good management and corporate governance than one that does not,” he says.

Emphasis is also placed on downside protections. “Our fund typically ha[s] much less economic sensitivity when compared to the infrastructure indices,” he says. That’s because the indices comprise a large number of stocks, while Pike’s firm uses a high-conviction approach for its fund.

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The focus is on high-quality businesses. Pike notes, “We typically have only 25 to 35 companies in the fund at any time. Within this, we expect that the top-10 holdings will be [about] 50% of the fund’s assets, to ensure that the fund strongly represents only our best investment ideas.”

For each of those companies, the firm constructs a detailed dividend discount model, forecasting cash flows at least 10 years into the future. The model is based on key assumptions, such as the potential for capital investment or regulatory change. To help develop the model’s assumptions, the firm has a global macroeconomic advisory committee.

Pike reiterates the importance of interacting with companies’ management over the long term. “When meeting with company management, we place a lot of emphasis on what insights we can gain [for] our valuation models or […] the market,” says Pike. “For instance, we recently met with Kinder Morgan to discuss some of their capital investment programs over the next two years.”

All of the homework pays off. Says Pike: “Our strategy is based on deep, fundamental research, which is our primary method of generating alpha for the fund.”

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