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Rosenberg: Opportunities Abound in Infrastructure

Andrew Gogerty

Andrew Gogerty: Hi, this is Andrew Gogerty with Morningstar, and today we're going to be discussing the appeal and the increase in opportunity for global infrastructure funds. Global infrastructure has been one of the areas that has seemed to be key in the economic recovery, both in the U.S. and abroad.

To discuss some of the opportunities in the sector and the resurgence of popularity in investing there, I have with me today Jay Rosenberg, lead manager of the First American Global Infrastructure Fund. Jay, thank you for joining me today.

Jay Rosenberg: Thanks for having me here.

Gogerty: Now obviously you have a bias, but what is the appeal to investing in this sector through a narrow fund as opposed to giving a global or a diversified manager the ability to go there when they spy value? Why a fund just focused on this sector?

Rosenberg: Well, I think you need a fund that is focused on the...to have a concentrated portfolio gives you access to the unique asset allocation benefits of owning infrastructure. It is very unique. The infrastructure companies have very defined, visible cash flows.

They're monopolistic. Oftentimes, the assets are monopolistic, so a regulator needs to step in and determine pricing, which means the demand is more inelastic. Demand doesn't ebb and flow as much with changes in the economy.

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You can imagine that these types of companies ride out the cycles of the economy much different than other types of companies. Very unique from an asset allocation standpoint, which actually gives them very unique correlation benefits versus other asset classes.

In addition to that, infrastructure is a very good inflation hedge. As inflation goes up, the replacement cost on infrastructure also goes up. We talked about a regulator needing to determine pricing.

That regulator typically allows infrastructure owners to increase the prices based on CPI or inflation. So it's hedged both on the asset side and on the cash flow side. So these are very unique cash allocation benefits known to owning infrastructure.

Gogerty: Why a global focus? This isn't something that is unique to your fund but most infrastructure funds are global by nature. Why a global focus and maybe not a U.S. and non-U.S. portfolio? Why put them together in one fund?

Rosenberg: Well, the privatization wave that has given us listed opportunities in infrastructure really hasn't hit the U.S. the same way it has hit the rest of the world. You couldn't create a diversified infrastructure product just from U.S. holdings.

If you look at what we hold, we invest across four silos of the global economy. We invest in transportation, in energy and utilities, government outsourcing, as well as communications infrastructure.

We're trying to create a really unique asset allocation tool. A tool--portfolio--that is going to behave differently than anything else in your portfolio. It's going to have low sensitivity to GDP (Gross Domestic Product), low sensitivity to changes in commodity prices. The only way to do that in a diversified sense is to invest globally.

Gogerty: Where are you finding some attractive valuation opportunities right now?

Rosenberg: We are finding attractive valuations all over the place, and it's not just us. It's also pension funds who are making bids to take out a lot of these companies. So in other areas of leveraged hard assets--like real estate--we're seeing companies actually trade at premiums to their underlying value, due to their access to capital. We're actually seeing IPOs, even blind pools, coming right now.

Infrastructure is the opposite. We're seeing bids to take out these companies, which means that there are still very attractively valued to institutions. We're seeing infrastructure companies trade at below-average valuation.

That's being recognized by these pension funds who want access to their very defensive predictable cash flow streams and are willing to arbitrage the value that they're able to buy it from private sources versus how inexpensive it is in the public market. We think there's a lot of opportunity in the infrastructure space.

Gogerty: What are these pensions and some of these other bigger pools of capital, what may they like in listed versus unlisted? Is it the regulation? Is it the disclosure? What's the appeal there?

Rosenberg: Well oftentimes, there's just not the opportunity to buy these assets in an unlisted form. Many of the listed companies came--they were once part of the governments. Governments retain shareholdings, but they spun off a portion of those to the public float, and they're only available in listed format.

There are opportunities to buy some private assets, but there's a much more diversity of infrastructure assets available through the listed space--and by the way, they can buy them at a discount today.

Gogerty: That will probably make them a little bit more attractive, definitely. Great, well thank you very much for your insight today. I appreciate it. This has been Andrew Gogerty with Morningstar and Jay Rosenberg of the First American Global Infrastructure Fund. Thank you.