TAMING THE BEAST. How to harness emerging markets and sleep at night October RARE Infrastructure Limited ABN AFSL

Transcription

1 TAMING THE BEAST How to harness emerging markets and sleep at night October 2017 RARE Infrastructure Limited ABN AFSL

2 Contents 1 RARE and the Emerging Markets Opportunity 2 Pure Exposure to Rapid Emerging Markets Growth 3 EM infrastructure - A long history of strong regulation and returns to shareholders 4 RARE Emerging Markets - Strong Risk Adjusted Returns to Equity 5 RARE Emerging Markets - Portfolio positioning and valuations Appendix

3 01 RARE and the Emerging Markets Opportunity

4 RARE and Emerging Markets Key point of difference for all RARE strategies RARE s global strategies have included EM infrastructure securities since inception in 2006 ~$700m invested across all strategies In 2008 RARE created the RARE 150 EM universe (+US$600bn mkt. cap) Analysts combine dual DM & EM coverage provides insight into potential development of EM regulatory/contractual frameworks. Over the last 12 months RARE conducted over 12 research trips, 100+ company meetings, 50+ industry meetings in EM countries. 4

5 EM investor experience has not matched the promise Investors have entered EM equity markets on the expectation of high returns from equities due to strong economic growth - this has not eventuated 5

6 The Emerging Market Infrastructure opportunity Growth and high returns balanced by the defensive nature of the asset class Significant growth Pure EM exposure Stable returns Inflation hedge Pure EM Exposure with strong inflation protection History of strong regulation Strong Risk Adjusted Returns to Equity (RARE) Diversification 6

7 Differentiation with Downside Protection RARE EM Strategy Beta to EM Equities (Monthly returns, AUD) Monthly Return (%) - RARE EM Infrastructure Fund (AUD) y = 0.51x 15% 10% 5% y = 0.81x 0% -10% -5% 0% 5% 10% 15% -5% -10% RARE EM Strategy Correlations (Monthly returns, AUD) MSCI EM Index MSCI AC World RARE Value Strategy Since inception yr yr RARE EM Strategy Active Share vs MSCI EM Index Since inception 5yr 3yr Monthly Return (%) - MSCI EM Equity Index (AUD) Source RARE calculations as at 30 June 2017 Inception date is 30/09/2008 FactSet Research Systems, AUD, Net (Portfolio Code CLIENT:/EM_REP_NET) MSCI Emerging Markets Index - Net, AUD, Factset Research Systems (Index Code - MSCI_EM_N:891800) MSCI AC World Gross, Local, FactSet Research Systems (Index Code MSCI:892400) Active Share source: Morningstar Direct Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or needs of investors.past performance is not indicative of future performance. 7 Active Share 98.5% 98.5% 98.6%

8 02 Pure Exposure to Rapid Emerging Markets Growth

9 Infrastructure spending required to meet structural drivers A long term opportunity for investors In 1950, 30% of the world s population was urban, and by 2050, 66% of the world s population is projected to be urban. In 2014 there were 28 megacities (population greater than 10 million). In 2030, there are projected to be 41 megacities. Source United Nations Department of Economic and Social Affairs, Population Division, World Urbanization Prospects 2014 Percentage urban and urban agglomerations by size class. 9

10 Pure EM revenue with strong inflation protection built in Top 10 Stocks Name Country Sector EM revenue % of revenues linked to inflation CPFL Energia Brazil Electric 100% 100% Power Grid India Electric 100% 80% NTPC India Electric 100% 95% Bharti Infratel India Communications 100% 95% Jasa Marga Indonesia Toll Road 95% 80% COPASA Brazil Water 100% 90% Ienova Mexico Gas 100% 100% Guangdong Investment Hong Kong Water 100% 95% Sabesp Brazil Water 100% 90% Gujarat State petronet India Gas 100% 100% Source RARE estimates. As at December 2016 The above information is included for illustrative purposes only and does not constitute specific investment advice or recommendations on any particular securities. Opinions expressed are subject to change without notice. 10

11 Capital expenditure in the RARE universe supports long term opportunities for investors Listed Infrastructure Capex (RARE EM Infrastructure Universe, USDbn) USDbn Source As at 31 December 2016 FactSet Research System, Bloomberg, RARE estimates. 11

12 03 EM Infrastructure A long history of strong regulation and returns to shareholders

13 High quality regulation RARE has met with the regulator of every company we invest in (and most of the ones we don t). Often we are the only investor (let alone competitor) they have ever met Levels of evolution generally following developed principals - protect short term earnings and compensate for long term changes in financing costs and demand profiles Increasing rapidly in line with need for investment Chile Water UK Water Mexican Airports Sydney Airport Regulation established Tariff Review Period 5 years 5 years 5 years 5 years Inflation Protected Yes Yes Yes Yes Efficiency Incentives Yes Yes Yes No Forward looking capex Yes Yes Yes Yes Concession life Perpetual Perpetual 50 years (2048) 99 years (2097) 13

14 Aguas Andinas Case Study Aguas Andinas is a Chilean sanitation company (water/sewerage) serving greater Santiago Almost 100% of earnings are regulated; regulation is best in class on a global basis. The concession is perpetual. Regulated return is the greater of CPI+3% or 7% (comparable to an inflation-linked bond) Most customers are households (>90%), typically with little demand volatility Minimal capex requirements, 100% payout ratio, healthy balance sheet. The above information is included for illustrative purposes only and does not constitute specific investment advice or recommendations on any particular securities. Opinions expressed are subject to change without notice. 14

15 Mexican Airports Case Study There are three listed private airport groups in Mexico (ASUR, GAP, OMA), with 34 airport concessions between them Regulation is well established and prescriptive, offering relatively high cashflow/valuation certainty Passenger forecasts are part of the tariff setting formula (i.e. passenger risk is only borne for 5 years) Capex is ongoing, but is compensated for in regulated tariffs Regulation is dual-till (i.e. commercial activities are non-regulated offering significant upside) The above information is included for illustrative purposes only and does not constitute specific investment advice or recommendations on any particular securities. Opinions expressed are subject to change without notice. 15

16 Stable Earnings Generation 300, , , , ,000 50,000 - Aguas Andinas (Chile Water) EBITDA (CLP) Grupo ASUR (Mexican Airport) EBITDA (MXP) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Source: RARE. Factset Research Systems Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or needs of investors. Past performance is not indicative of future performance. 16

17 04 RARE Emerging Markets Strong Risk Adjusted Returns to Equity

18 Investors are rewarded well for the risks taken Current EM Portfolio Utilities vs DM Utilities (Income universe) 18.00% Total Return Decomposition and Risk Adjusted Ratio since 31 December % 14.00% % 10.00% 8.00% 6.00% % % 3.80% 4.49% % EM Portfolio Utes DM Utilites R Annualised Dividend Return (Weighted Average,LHS) Annualised Price Return (Weighted Average, LHS) Risk Adjusted Ratio (RHS) Source RARE calculations from FactSet data. As at 30 June Past performance is not indicative of future performance. 18

19 RARE Emerging Markets Fund Risk in line with S&P Global Infrastructure Index Source Morningstar Direct as at June 2017 Past performance is not indicative of future performance. 19

20 Performance of RARE EM strategy 350 Growth of $100 (monthly returns, AUD since inception) S&P EM Infra provides a small benefit to MSCI EM Equities RARE applies infrastructure expertise across a combination of: Definition; Long term asset level analysis; Active, benchmark unaware portfolio construction; Focus on Risk Adjusted Returns to Equity 0 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 RARE EM Fund Representative Mandate Gross (Unhedged) EM150 S&P EM Infrastructure Index MSCI EM Index Source RARE calculations as at 31 March Inception date is 30/04/2008 FactSet Research Systems, AUD, Net (Portfolio Code CLIENT:/EM_REP_NET) MSCI Emerging Markets Index - Net, AUD, Factset Research Systems (Index Code - MSCI_EM_N:891800) 20 MSCI AC World Gross, Local, FactSet Research Systems (Index Code MSCI:892400) The performance data for the EM 150 is non-actual performance data and reflects the performance of stocks which have been chosen retrospectively

21 05 RARE Emerging Markets Portfolio positioning and valuations

22 Portfolio performance To 31 August month (%) 1 year (%) 3 year (%) 5 year (%) Inception (%)² RARE Emerging Markets Fund¹ BENCHMARK: Citi EM Sov Invest Bonds USD+5% S&P EM Infrastructure Index MSCI Emerging Markets Index Source 1. RARE Calculations to 31 August FactSet Research Systems, AUD, Net (Portfolio Code - CLIENT:/PUBLISHER/RIRSEM.ACCT) 2. Inception date is 01/10/2008 BENCHMARK: Citi EM Sov Invest Bonds USD+5%, Factset Research Systems (Index Code - CLIENT:EMSOVBONDSUSDPLUSPR) S&P EM Infrastructure Index - Net, AUD, Factset Research Systems (Index Code - SPTH_N:STRKEIFX) MSCI Emerging Markets Index - Net, AUD, Factset Research Systems (Index Code - MSCI_EM_N:891800) Past performance is not indicative of future performance. 22

23 Portfolio positioning & valuation At 31 August 2017 Top Stocks Country Sector Weight (%) Power Grid India Electric 5.8 Malaysia Airports Malaysia Airports 5.7 Bharti Infratel India Comms 5.7 Jasa Marga Indonesia Toll Roads 5.2 Gujarat State Petronet India Gas 4.9 NTPC India Electric 4.8 Telesites SAB de CV Class B Mexico Comms 4.3 Ienova Mexico Gas 4.1 Light Brazil Electric 4.1 Beijing Capital International Airport China Airports 3.9 Key Portfolio Statistics¹ Avg Market Capitalisation 8.4bn RARE Div Yield (Forward) ² 3.1% DPS Growth (Est. 5 Year) ² 11.1% Gearing (Current) 27.5% Interest Cover (Historic) 7.9x EV/EBITDA (Forward) ³ 10.0x Regional exposure Sector exposure Latin America 35% Ports 6% Rail 1% Airports 10% Comms 10% Cash 7% Cash 7% Electric 30% Asia Pac EM 59% TollRoads 10% Water 14% Gas 11% Source RARE Calculations at 31 August FactSet Research Systems (Portfolio Code - CLIENT:/PUBLISHER/RIRSEM.ACCT) 1. Based on weighted averages RARE Div Yield and DPS Growth forward estimates are based on RARE research and forecasts. 3. EV means Enterprise Value (market capitalisation + preferred equity, if any + net debt) and EBITDA means earnings before interest, tax, depreciation & amortisation. The above information is included for illustrative purposes only and does not constitute specific investment advice or recommendations on any particular securities.

24 Portfolio excess returns remain high 21% Portfolio IRR Cost Of Equity 19% 17% IRR 15% 13% 11% 9% Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Source RARE Calculations calculations from FactSet data. As at 30 June Past performance is not indicative of future performance. 24

25 RARE EM EV/EBITDA Portfolio valuations still attractive 12x 10x 8x 6x 4x 2x 0x Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 RARE EM EV/EBITDA Upper Bound (1 STDEV) Lower Bound (1 STDEV) Source RARE calculations from FactSet data. As at 30 June Past performance is not indicative of future performance.

26 RARE EM strategy Correlation to global bonds is low 1 Correlation to Global Bonds Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 RARE EM Strategy S&P EM Infra Source RARE calculations. Factset Research Systems 26

27 Summary of key points EM Infrastructure is a beneficiary of the structural drivers of EM growth Concentrated exposure to EM GDP and inflation Need for private capital underpins revenue frameworks most rapidly copying DM regulatory evolutions RARE has dedicated more than 10yrs to understanding EM infrastructure Proprietary definition added value above MSCI equities or S&P EM Infrastructure Index Global infrastructure expertise applied to EM companies has identified significant opportunity for investors Benchmark unware portfolio construction provides flexibility to limit drawdown and participate in the upside Enhanced portfolio outcomes Lower risk way to gain emerging markets exposure with strongly growing income profile Diversification benefits whether used within a global infrastructure portfolio or alongside a developed market only portfolio 27

28 Important information While the information contained in this document has been prepared with all reasonable care, RARE Infrastructure Limited ( RARE ) and its related companies accept no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This information has been prepared without taking account of your objectives, financial situation or needs. Potential investors should seek independent advice as to the suitability of any products to their investment needs. The fact that shares in a particular company may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock. Any opinions or outlook contained in this document is subject to change without notice and do not constitute investment advice or recommendations. The distribution of this document may be restricted in your jurisdiction and you are not authorised to distribute this information. This document does not constitute an offer or solicitation in any jurisdiction in which to make such an offer or solicitation would be unlawful. Legg Mason Asset Management Australia Limited (AFSL No ; ABN ) ( Legg Mason Australia ) is the responsible entity for the RARE Infrastructure Value Fund Hedged (ARSN ), RARE Infrastructure Value Fund Unhedged (ARSN ), RARE Infrastructure Income Fund (ARSN ) and RARE Emerging Markets Fund (ARSN ). Applications to invest can only be made on the application form accompanying the Fund Product Disclosure Statement (PDS) dated 30 September Potential investors should consider the PDS and the Additional Information Booklet (AIB) before deciding whether to invest, or continue to invest in the Fund(s). The PDS and AIB can be obtained on or by contacting RARE. Contact RARE on (02) , or by writing to Level 13, 35 Clarence Street, Sydney, NSW 2000, by fax on (02) or at operations@rareinfrastructure.com. Legg Mason Australia can be contacted by writing to Legg Mason Australia, Level 47, 120 Collins Street, Melbourne, VIC 3000, by telephone on or by fax on (03) Past performance is not indicative of future performance. Legg Mason Australia does not guarantee any rate of return or the return of capital invested. Investments are subject to risks, including, but not limited to, possible delays in payments and loss of income or capital invested. Investment Advisers This presentation has been prepared for investment advisers only. This presentation presents information in a manner which is not suitable for retail investors and RARE does not authorise the provision of this presentation to retail investors. Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd (ABN: , AFSL: ), a subsidiary of Morningstar, Inc, without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant Product Disclosure Statement (in respect of Australian products) before making any decision to invest. Neither Morningstar, nor Morningstar s subsidiaries, nor Morningstar s employees can provide you with personalised financial advice. To obtain advice tailored to your particular circumstances, please contact a professional financial adviser. DISCLOSURE: Morningstar employees may have an interest in the securities discussed in this report. Please refer to Morningstar s Financial Services Guide (FSG) for more information Note: Some material is copyright and published under licence from ASX Operations Pty Limited ACN ( ASXO ).

29 Appendix

30 EM Infrastructure opportunity set 1% 2% 2% 2% 3% 4% 6% 7% MSCI EM Index 1% 1% 1% 4% 9% 12% 29% 15% China Korea Taiwan India Brazil South Africa Mexico Russia Indonesia Malaysia Thailand Poland Turkey Chile Philippines Other 2% 1% 3% 5% 5% 3% 1% 5% 0% EM Infrastructure 7% 5% 27% 17% 18% 1% 1% Country Weight 150 Companies 45 Regulators 22 Countries MSCI EM EM Infra Largest 29% 27% Top 3 55% 62% Top 5 71% 71% Top 10 89% 88% Source RARE calculations as at 30 June The EM150 is an investment universe as determined from time to time for the RARE Emerging Markets Strategy IEM (MSCI EM Index). Source: 30