Looking for stable, predictable cash flows, fund manager Joshua Duitz invests in infrastructure companies in Latin America. He explains his strategy here, as well as what investors can do to find the same stability in today’s markets.
Kate Stalter: I’m talking today with Joshua Duitz. He’s the co-manager of the Alpine Global Infrastructure Fund (AIFRX), which has a four-star rating from Morningstar.
Josh, give us the fund’s objective, and tell us a little bit about your investment philosophy.
Joshua Duitz: Our objective for the fund is to provide both growth and income. We’re looking to invest in companies that have stable, predictable cash flows. Our annual return since inception is almost 19% per year. We have a yield of about 4.5% paid quarterly.
We’re looking to invest in companies that are monopolies or quasi-monopolies. We want to own the owners of infrastructure globally. The combination of urbanization, higher standards of living, and population growth, we believe, are going to propel infrastructure spending for decades to come.
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So, when we’re looking to invest, we’re looking to invest globally, both in emerging markets and developed markets. We’ve noticed that in the US, we’re spending about 2% of our GDP on infrastructure, which is a decline of about 33% from where we were several decades ago. When we look across the globe, we see Europe spending 5%, China spending 9%, India spending 8%…
The real reason countries in the emerging markets are spending so much on infrastructure is because of urbanization. Back in the 1950s, 29% of the world’s population lived in cities. Today, over half the world’s population lives in cities.
Just to put numbers to that—in 1960, about one billion people lived in cities. Today, about three-and-a-half billion people live in cities. So, we see the need for infrastructure globally, and that’s what we’re trying to capitalize in this fund.
Kate Stalter: Tell us a little bit about some of the specific holdings within the fund. I did happen to notice you had a lot of overseas-traded companies in the fund.
Joshua Duitz: Sure. So, we’ll start with roads, because that’s a sector within infrastructure I love to own.
Let me just explain roads a little bit. Generally, when you own the concession for a road—and many roads have been privatized throughout the globe in countries across Europe, and Australia, and Canada, and China, and the UK, and Brazil. Roads have been privatized.
We’re starting to see it some here in the United States, with the Indiana Toll Road and the Chicago Skyway, which were both privatized back in 2005. So when you own a road, you generally own a concession for a number of years, and that could vary anywhere from 20 years to 99 years.
When you own it, you generally get tariff increases with inflation, so it’s great inflation protection. So, every year, regardless of what inflation is, you get to raise your tolls.
In Brazil, many of the toll companies got to raise their tariffs by 9.7% back in July. Generally, traffic rose with GDP as well, and…in developed countries, it grows one-to-one with GDP. In emerging markets we’ve seen traffic grow one-and-a-half times GDP, and that’s because consumers are getting a car for the first time. They could afford to buy cars for the first time, so therefore traffic is growing much faster than GDP.
In fact, in Brazil, we’ve seen traffic growth about two times GDP. So, two of my top ten holdings are both companies in Brazil that own concessions on roads. One of them being CCR (Brazil: CCRO3), and the other one being EcoRodovias (Brazil: ECOR3).
Not only are we seeing great traffic growth, but we believe there is going to be opportunity for expansion—not only of their current roads, but in purchasing new roads and other infrastructure projects as Brazil gets ready for the 2014 World Cup and the 2016 Olympics. So, those are two of our favorite companies.
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Kate Stalter: How about elsewhere in the world then, Josh? You’ve talked about Latin America a bit. Any other region?
Joshua Duitz: Sure. We certainly invest in China. We own several companies there. They are also expanding their roads, and we’ve seen good traffic growth there. We’ve invested in a water company in the Philippines, and in Brazil, because there are opportunities there.
Also, ports. Generally, in container ports, we’ve seen about a10% compound annual growth rate since about 1990 in container ports, and we believe we’re going to continue to see global trade, and the ports certainly should benefit from that globally. We’ve invested in Indonesia, in the Philippines, and China in Asia, as well as India.
Kate Stalter: One of the things that occurs to me: Earlier this year, last year, emerging-market names were kind of in vogue, and then a lot of them just got hit really hard as the global markets declined. How should individual investors be viewing emerging market plays at this point?
Joshua Duitz: I think that certainly in the short-term, emerging markets have gotten hurt. We’ve seen Brazil down 14% year-to-date…and in dollar terms, down about 20%. Hong Kong is down about 17.5% year to date.
But again, what we’re trying to do here is invest for the long term. We believe that there will be growth in emerging markets long-term, and certainly growth that outpaces Europe and outpaces the United States.
So, we think it’s important to have emerging-market exposure in any portfolio, and I think when you invest in companies like infrastructure in emerging markets that have stable, predictable cash flows, it kind of cushions the blow a little bit.
And although we invest in equities—so there is volatility—we think the companies with stable, predictable cash flows over the long term should have less volatility than others. And our beta is lower than the S&P 500, even with our 35% emerging-market exposure.
Kate Stalter: So, is it somewhat of a matter of investors being patient in this space?
Joshua Duitz: I think when you’re investing in infrastructure, you absolutely have to look at the long term. We are investing for the long term and we can see the trends of the long term. As I mentioned earlier, urbanization, which is happening, doesn’t happen overnight, but it happens over time.
Our earnings aren’t going to grow 20% to 30% in most companies, although they have been growing that rate on Brazilian roads, but overall the way to look at this is: Our earnings should grow with GDP growth, which is over the long term 2% to 3%, plus inflation another 3% to 4% over the long term. Plus, we have a yield on the companies we own of about 3% to 4%, so we should have 10% to 12% long-term growth.
And as long as you’re patient, and hold these companies, and recognize the investment companies with stable, predictable cash flows, I think over the long term we should have nice returns for our investors.
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Kate Stalter: Well, that leads into the question that I wanted to wrap up with today. What’s your best advice overall for retail investors who have been challenged by the recent market conditions? What would you suggest they do?
Joshua Duitz: Certainly, I think that if you want to invest in this market, you should do it over time. You’re never going to pick the absolute bottom of the market, but I think if you want to invest now, I would certainly put in half the money now, or 25% of the money, and pick four or five different points to continue to invest.
You don’t want to get scared by the market. We’ve seen the market go down and then rebound, ultimately.
And ultimately, if you’re investing in companies that have steady, stable, predictable cash flows with a nice dividend yield—and the fund has a yield of over 4% now—I think over the long term, investors will have some handsome returns.