Transcript Document

Building a stable road ahead for investors
September 2009
Overview
1
The Global Infrastructure Opportunity
2
Features & Benefits
3
RARE Infrastructure Limited
4
Why Infrastructure & Why Renaissance Investments
 What is an infrastructure asset
 Why invest in infrastructure
 Stable Growth
 Strong Diversification
 Steady Income & Inflation Protection
 Who is RARE
 RARE’s focus and investment process
 RARE stock examples
 Access in two easy options
2
1
The Global Infrastructure
Opportunity
What is an infrastructure asset?
Less Regulated
More Competitive
•
•
•
•
Housing
Public Health
Education
Prisons & Stadia
• Gas/electric
transmission &
distribution
• Water & wastewater
•
•
•
•
Airports
Toll Roads
Railways
Ports
• Energy retail &
merchant generation
• Logistics
• Telecom services
Increasing Risk
4
Why should your clients consider investing
in Global Infrastructure?
Stable Growth
 Defensive asset class
 Access to a growing market
 Long-term stable returns
Strong Diversification
 Lower correlation
Steady Income & Inflation Protection
 Attractive yields
 Inflation hedge
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2
Features & Benefits
Stable growth: defensive asset class
 Listed Infrastructure stock with its defensive investment characteristics
becomes a relatively attractive asset class;
 Consumers continue, throughout economic cycles, to use electricity, gas,
water, drive their cars on toll roads and use other essential infrastructure.
 Global Infrastructure is insensitive to economic and market cycles.
Return Comparison
(Comparison of monthly returns, RARE 200 vs MSCI World, local currency total returns 1997 – 2009)
15%
RARE 200
RARE 200
outperforms
MSCI or
is greater than
zero in 87% of
observations
10%
M SCIW orld
5%
0%
-5%
-10%
-15%
-15%
-12%
-9%
-6%
-3%
0%
3%
Source: Bloomberg, RARE calculations
RARE 200 is a list of about 200-250 companies with a combined market capitalization of approximately USD 2.6
trillion as at June 30, 2009
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Stable growth: access to a growing market
 Upgrades to existing infrastructure assets will require new capital and this will be funded
primarily by existing listed companies;
 Privatization of existing government owned infrastructure;
 New projects undertaken by the private sector in partnership with governments.
Growth of Listed Infrastructure as an Asset Class
(RARE investment universe aggregate market capitalisation, 2000-2009, USD)
2,500
90
M arketCap ofNew
Com paniesListed (RHS)
75
RARE 200 M arketCap
2,000
60
1,500
45
1,000
30
500
15
0
2000
Prim ary Issuance (USDm )
RARE 200 M arketCapitalisation (USDm )
3,000
“The growth potential is set against a
backdrop of lower government
spending on infrastructure and
consequently a greater participation
from the private sector”
2001
2002
2003
2004
2005
2006
2007
2008
Source: Bloomberg, RARE calculations
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Stable growth: long-term stable returns
Monthly Volatility vs Average Return
(rolling three year observations Jun-97 to Jun-09, local currency total return)
 Over the last 12
years, global listed
infrastructure stock
has had lower
volatility and higher
returns than global
equities.
40%
RARE 200
Annualised Return (%)
30%
MSCI World
GPR REIT World
20%
10%
0%
-10%
-20%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Volatility (Standard Deviation of Monthly Returns) (%)
Source: Bloomberg, RARE calculations
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Asset class return comparison –
good long term returns
From 30 June 1998
to 30 June 2003
From 30 June 2003
to 30 June 2009
From 30 June 1998
to 30 June 2009
8.6%
14.9%
12.0%
(2.5%)
5.1%
1.6%
Global Infrastructure
RARE 200, TR CAD 1
Global Equity
MSCI World CAD2
Global Property
GPR REIT World CAD3
8.5%
(0.4%)
3.6%
Global Bonds
World Govt Bonds4
5.8%
1.9%
3.6%
Source: Bloomberg, RARE calculations. Monthly returns June 1998 to June 2009
1 RARE Investment Universe (RARE 200), Total Return, Canadian Dollars
2 MSCI AC World Daily Total Return Gross, Canadian Dollars
3 Global Property Research (GPR) REIT World, Total Return, Canadian Dollars
4 Citigroup World Government Bond, Total Return, Canadian Dollars
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Strong diversification: low correlation
 The relatively low correlation of infrastructure stock earnings results in
reduced volatility compared with other asset classes increasing the
diversification of a portfolio.
Global
Infrastructure
Global Infrastructure
RARE 200, TR CAD
Global Equity
MSCI Global CAD
Global Property
GPR REIT CAD
Domestic Equity
Toronto Index
Global Bonds
Citigroup World Bond, CAD
1
Global Equity
Global Property
Domestic Equity
Global Bonds
0.53
2
3
4
0.58
0.42
0.43
0.85
0.33
0.06
-0.56
-0.07
-0.50
Source: Bloomberg, RARE calculations. Monthly returns June 1998 to June 2009
1 MSCI AC World Daily Total Return Gross, CAD
2 Global Property Research (GPR) REIT World, CAD
3 Toronto Stock Exchange Index
4 Citigroup World Government Bond, CAD
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Steady income & inflation protection:
inflation hedge
A natural hedge against inflation exists for many infrastructure
assets, through tariff movements or toll increases being
explicitly linked to inflation.
 The majority of utility assets in the UK, Europe and Australia are
governed by explicit legislation that links revenue increases to
inflation;
 The majority of toll roads have contractual rights that determine
increases in tolls be set by reference to an inflation factor.
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3
RARE Infrastructure Limited
Who is RARE?
Based in Sydney, Australia, RARE has one of the world’s most
experienced global infrastructure investment management teams with
more than 70 years combined global infrastructure expertise. RARE’s
objective is to provide investors with regular and predictable income,
comprised of dividends and capital growth from a portfolio of global
infrastructure securities.
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Key focus areas for investment
Less Regulated
More Competitive
•
•
•
•
Housing
Public Health
Education
Prisons & Stadia
RARE’s Focus
• Gas/electric
transmission &
distribution
• Water & wastewater
•
•
•
•
Defensive assets
Revenues relatively stable across
economic cycles
Airports
Toll Roads
Railways
Ports
• Energy retail &
merchant generation
• Logistics
• Telecom services
Increasing Risk
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RARE investment process
RARE Universe
RARE 200
(Infrastructure Characteristics)
(Investment Universe)
Focus List
Portfolio
Long dated assets
Resilient &
predictable cash
flows
Ownership of
monopoly assets
Attractive yield
Inflation hedge
Low volatility of
earnings
1
Reasonable liquidity
Robust financial
profile:
- Gearing
- Coverage ratios
Relatively
undervalued
Attractive RAREs
Strong mgmt & corp
gov
Supportive reg
environment
Visible cash flows
80% bottom up
20% top down
1,200 stocks
USD3.0t1
200-250 stocks
USD1.8t1
80-120 stocks
30-60 stocks
Screening
First Research
Detailed Research
Portfolio Construction
As at 31 June 2009
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ITC Holdings
US utility company based in the Midwest. Sole business is
Electricity Transmission, ie, no natural competitors
 Typically electricity is generated long distances from where it
used
 Over last 20 years in US there has been an underinvestment in
transmission relative to generation and distribution.
 ITC incentivized to invest at very favorable ROE – 13% in order
to meet the short fall. Rest of the sector 10% ROE.
 Highly visible and predictable cash flows – guaranteed by the
regulator – no volume risk
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SES Global
SES provides global broadband communications service
through a fleet of satellites covering 99% of worlds population
 Duopoly, the barriers to entry are extremely high
 Ongoing running costs are extremely low (EBITDA margins
70%), only cost are the satellites, US$200 mil (15 yr lifespan)
 40 mil dishes across Europe ( 20 mil in UK with BSKyB – need
to individually alter every dish to change satellite providers)
 ‘National Asset’ for Luxembourg – includes government
ownership, enjoys advantageous relationship when negotiating
any regulatory changes
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Market outlook – longer term
 Significant Government intervention in global financial system
̶
short term support, in return for longer term increased
regulation and likely reduced private/corporate credit
̶
still risk associated with the financial system
 Unconventional central bank policy initiatives will create
unintended consequences for global markets
̶
greater volatility than investors have seen over last 20 years
 Resurgence of “hard assets”, probably infrastructure (over real
estate), given inflation threat
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Market outlook – listed infrastructure
 Significant buying opportunity for listed infrastructure
̶
prices still at a disconnect to fundamental value
̶
credit markets supporting equity valuations
 No visible cut back in capex for companies in the RARE portfolio
 Companies continue to have access to debt capital
 Defensive stocks have demonstrated earnings sustainability
through the cycle
 Seeing upward earning revisions on the more GDP sensitive
stocks
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4
Why Infrastructure &
Why Renaissance
Investments
Why Global Infrastructure?
Why Renaissance Investments?
 A fast growing asset class that provides income, stability and growth
– the cornerstone of many client needs both today and well into the future.
 This asset class has historically been used by institutional investors
as they sought to better diversify their portfolios - it is now available
to you and your clients.
 At Renaissance Investments – we search the globe for the best
Investment Managers to deliver the investment expertise in order to
build a stable road ahead for your investors.
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Accessing Global Infrastructure in two easy options
Option 1
Option 2
Renaissance Global
Infrastructure Fund
Renaissance Optimal
Income Portfolio
Add as a part of your clients
existing portfolio
An all-in-one Portfolio Solution
Add a 5-15% weighting of a
traditional portfolio
Offers diversification, income
and growth
Optimal balance between
income generating and equity
based funds
Delivers an optimal income
approach along with monthly
cash flows to meet your clients
evolving income needs
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Renaissance Global Infrastructure Fund
as of July 31, 2009
Rare continues to selectively increase weighting to more defensive North American
electricity utilities and gas and electricity transmission stocks as well as in European
water and gas utilities
Source: Renaissance Investments
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Renaissance Optimal Income Portfolio
as of July 31, 2009
This Portfolio optimizes the unique contributions from a group of carefully selected
managers and asset classes to achieve the desired characteristics of an income
generating investment product.
Source: Renaissance Investments
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Appendix
Important Information:
ADDITIONAL NOTES:
Terms & Definitions:
RARE’s research and analysis indicates that many infrastructure assets or investments possess
common investment features, including:
A defensive asset class. When economies experience periods of weakness, unlike many industrial
companies, the revenues of listed infrastructure stocks tend to be resilient because consumers
continue to use electricity and gas for heating, cooling and lighting, and water, drive their cars
on tollroads and use other essential Infrastructure
Attractive income distribution yields, particularly for mature stage assets where the company
earnings are more certain and sustainable
Access to growing markets. There has been rapid growth of listed infrastructure assets over the
last 12 years. As at June 30, 2008, the aggregate market capitalization of infrastructure stocks
was approximately $2.6 trillion spread across approximately 220 companies ( RARE 200 ) This
is only a small fraction of the global stock of infrastructure assets, with the majority of assets
still owned by governments. However, there has been a growing trend by governments to
transfer these assets to private ownership.
De-leveraging. A company's attempt to decrease its financial leverage. Companies will often take on
excessive amounts of debt to initiate growth. However, using leverage substantially increases
the riskiness of the firm. If leverage does not further growth as planned, the risk can become
too much for the company to bear. In these situations, all the firm can do is “de-lever” by
paying off debt.
EV (Enterprise Value) is defined as (market capitalization + preferred equity, if any + net debt)
EBITDA is defined as earnings before interest, tax, depreciation & amortization.
Hard assets. Hard assets are the tangible property of a company or partnership, such as the
buildings, furniture, real estate, and other equipment it owns.
Inflation hedge. A natural hedge against inflation exists for many infrastructure assets (such as
utilities and toll roads) through tariff movements or toll increases being explicitly linked to
inflation.
Infrastructure assets are generally defined as long term capital intensive investments serving the
community. RARE defines them as assets that societies expect to exist to provide the basic
services that are essential for communities to function and for economies to prosper and grow.
Long term stable returns. RARE’s research shows that over the last 10 years, global infrastructure
generally has had lower volatility and higher returns than both global equities and global
property and is less likely than global equities to result in negative returns over rolling 2 year
periods. RARE highlights this by showing the distribution of average monthly returns versus
the volatility of returns over the last 10 years for the RARE200 investment universe compared
with global equities (as measured by the MSCI AC World Daily TR Gross in local currency) and
global property (as measured by the GPR REIT World Index.)
Long Dated Assets
Usually requiring a significant initial capital commitment, infrastructure assets are often long
dated, exhibiting a lifecycle starting as a green field investment, followed by a developing
period, leading to a mature phase. Each of the lifecycle stages may have different risk/return
characteristics.
Resilient and Predictable Cash Flows
Demand or volume growth is usually inelastic with a large degree of resilience to economic
conditions. Demand is usually more dependent on demographic factors. As such, volumes
are largely predictable, translating into considerable certainty of underlying cash flows,
earnings and dividend sustainability.
Attractive Yield
Particularly for mature stage assets, a key attraction for RARE is the relatively high
distribution yield generally expected from infrastructure investments. Due to the earnings
certainty provided, distributions are in many cases sustainable.
Inflation Hedge
RARE considers that a natural hedge against inflation exists for many infrastructure assets,
through tariff movements or toll increases often being explicitly linked to inflation.
Low Maintenance Capital Expenditure
The assets tend to require low maintenance capital expenditure relative to operating cash
flows
Largely Fixed Operating Cost Base
The operating cost base of the assets is largely fixed.
Monopoly Power, may be Regulated
RARE’s analysis indicates that legal or economic monopoly assets generate the bulk of
earnings for many utility and infrastructure investments, reducing the impact of competitive
market forces upon returns.
High Leverage
Given the relative size of the assets and what RARE assesses as resilient and predictable
cash flows, RARE’s research shows that infrastructure assets often carry significant leverage,
particularly in the later stages of an asset’s lifecycle.
Low volatility and correlation to other asset sectors
Given the nature of the assets and the anticipation by investors of certainty of income
streams, infrastructure assets are often characterised as offering both low volatility and
limited correlation to other asset sectors
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Thank You
While the information contained in this report has been prepared with all reasonable care, RARE Infrastructure Limited (“RARE”) and
CIBC Asset Management Inc. (CAMI) accept no responsibility or liability for any errors, omissions or misstatements however caused.
This information is not personal advice. This advice has been prepared without taking account of your objectives, financial situation or
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. All opinions and estimates expressed in this presentation are as of the date of publication unless otherwise
indicated, and are subject to change. Any information or discussion about the current characteristics of this fund or how the portfolio
manager is managing the fund that is supplementary to information in the prospectus is not a discussion about material investment
objectives or strategies, but solely a discussion of the current characteristics or manner of fulfilling the investment objectives and
strategies, and is subject to change without notice. You should not act or rely on the information without seeking the advice of a
professional. The material and its contents may not be reproduced or distributed without the express written consent of CIBC Asset
Management Inc.
Renaissance Investments is offered by CIBC Asset Management Inc. Commissions, trailing commissions, management fees, and
expenses all may be associated with mutual fund investments. Please read the Renaissance Investments family of funds simplified
prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be
repeated. To obtain a copy of the Renaissance Investments family of funds simplified prospectus, call 1-888-888-FUND (3863).
Alternatively, you may obtain a copy from your advisor. ™Renaissance Investments is the registered trademark and “invest well. live
better.” are trademarks of CIBC Asset Management Inc.
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Thank You
Renaissance Investments is offered by CIBC Asset Management Inc. This material was prepared for investment professionals only and
is not for public distribution. It is for informational purposes only and is not intended to convey investment, legal or tax advice. The
material and/or its contents may not be reproduced or distributed without the express written consent of Renaissance Investments.
™Renaissance Investments and “invest well. live better.” are trademarks of CIBC Asset Management Inc.