1801 toll

The listed infrastructure sectors to watch in 2018

Articles | 12 January 2018

As we enter 2018, our largest overweight position is an exposure to toll roads. The sector contains a number of high quality companies with robust cash flows, high operating margins and effective barriers to entry. The scope of toll road operators to negotiate with governments to secure additional compensation in exchange for capital expenditure gives the sector a growth optionality that is consistently under-estimated by the market. European toll roads are going through an earnings upgrade cycle, as improving economic conditions support consistent volume growth in France, Spain and Italy.

We are also overweight railroads. Japanese passenger rail companies such as East Japan Railway and Central Japan Railway own unique assets producing stable cash flows. These companies have been somewhat overlooked this year as investors have focussed on higher risk areas of the market. They are now trading on appealing valuation multiples, despite robust commuter volumes on their trains, reflecting the Japanese unemployment rate at 23-year lows.

Relative to its benchmark index, the FTSE Global Core Infrastructure 50-50 Index, the UK represents our largest regional overweight. This exposure reflects a substantial holding in regulated utility National Grid. The company, which recently sold a majority stake in its lower-growth gas distribution division, pays a generous and growing dividend, and also owns a highly cash-generative US business. The UK’s recent political uncertainty has caused the stock to trade down to an attractive valuation multiple, moving it to a higher rank within our investment process and causing us to increase our position in the stock.

Global listed infrastructure has delivered strong absolute returns to investors in recent years. A few sectors, particularly airports and some US utilities, have now traded up to valuations that we find difficult to justify on fundamentals.  Accordingly, we have an underweight exposure to those sectors heading into 2018.

The Colonial First State Wholesale Global Listed Infrastructure Fund offers a high conviction portfolio of quality infrastructure companies. The managers take a long-term view and focus on fundamental mispricing.  Sector and regional exposures tend to be an outcome of bottom-up stock calls and often contrarian in style.


This document is issued by Colonial First State Asset Management (Australia) Limited AFSL 289017 ABN 89 114 194311.This document is directed at persons of a professional, sophisticated or wholesale nature and not the retail market. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document. References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere. Commonwealth Bank of Australia (the “Bank”) and its subsidiaries are not responsible for any statement or information contained in this document. Neither the Bank nor any of its subsidiaries guarantee the performance of the fund or security or the repayment of capital. Investments in the fund or security are not deposits or other liabilities of the Bank or its subsidiaries, and the fund or security is subject to investment risk, including loss of income and capital invested. Past performance is not a reliable indicator of future performance. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. Copyright © (2017) Colonial First State Group Limited. All rights reserved.