Ian Smith - Lazard Global Listed Infrastructure Fund

MP: What are the advantages of infrastructure for superannuation investors?

IS: Low risk, low volatility. Let’s put risk in two categories, low volatility of returns and low risk of capital loss and inflation linked performance - the capacity to deliver increasing performance over time.

MP: That of course depends upon getting the right contract with the right Government that allows you to do that.

IS: It depends upon getting preferred infrastructure as we’ve termed it. Now we’ve looked around the world at the forms of regulation that exist in a variety of sectors in a variety of countries and formed a view that there are in the universe of about 350 companies that we’ve looked at, a spectrum of ranges of risk and we’ve identified the 70 top companies to be what we’ve called our preferred universe.

MP: The problem for trustees of getting allocation to infrastructure, of getting aboard, is this a way around that.

IS: If you’re a super fund trustee at the moment and you’re looking at the ways that you could set in infrastructure sector. There are fundamentally 3 ways. You can go and buy an asset yourself. The chances of doing that are limited only as you’ve got very large super funds around the world and that have to have extraordinary skill sets to do so. So let’s count that out. The second alternative is to enter into a fund that holds the assets directly. And through one of those unlisted funds yes, you can access infrastructure assets and you’re right - the opportunity to invest in those is reasonably limited. The availability of getting into those and being invested is relatively low compared with other points in time.

MP: The fees have become quite high

IS: The fees are significant to go that route. The third alternative is to invest in the listed market. We looked at that and we actually looked at'¦. there’s limited history back in time of listed infrastructure compared with direct infrastructure so we went back and examined property to understand whatever property in a listed form had been a reasonable proxy for direct property. And we can confidently say to people that that is definitely the case. We are therefore confident in saying to people that listed infrastructure will similarly act as a very good proxy for direct infrastructure and there is a significant volume of listed infrastructure in the world. As I said we looked at about 350 companies at the moment. They aggregate to $A2.4 trillion of market capitalization. This is a very deep sector around the world and a significant opportunity.

MP: What are some examples then of what you regard as preferred infrastructure.

IS: We like tollways and we’ve found a number of tollways around the world that are attractive. We like water companies. We’ve found some good water companies around the world. Interestingly though it takes discipline to identify whether water companies are good or bad. As with any other sector. If I gave you a very quick example, the Greek water company isn’t preferred infrastructure. It has aspects of its regulation that make it not one of our preferred set unlike the three American water companies and the approximately 5 companies in Britain that we do like. We’ve also looked at airports, we’ve looked at electric utilities, we’ve looked at diversified utilities, to identify 70 companies that we believe best provide that opportunity for investors.

MP: The problem for a fund of funds is always fees on top of fees. How expensive does it work out.

IS: We believe our fees are quite moderate. They’re comparable to what’s charged for a person managing listed equities in other sectors. Our base fee is 90 basis points on assets with no performance fee.

MP: For the launch of the fund what percentage are Australian and what percentage international.

IS: There are six Australian companies amongst the 70 as we looked at the value rank today we think that we’d invest in two Australian companies'¦

MP: Which are?

IS: Macquarie Infrastructure and the Australian Pipeline Trust.

MP: What’s the potential with this to move from the wholesale to become a retail offering.

IS: I think the product has great appeal to our retail investor base. We will be launching it to the wholesale market first. We anticipate that in time we’ll make it available through a platform to the retail investor.

MP: What sort of returns should people expect from this asset class.

IS: Our benchmark is to deliver CPI plus 5% over a rolling 5 year period.

MP: So in the Australian context that’s about 8%. That’s net of fees?

IS: That’s before fees.

MP: Are Government’s smarter now? They really were played for mugs by a number of operators that got particularly good deals.

IS: There are instances of concessions that have been granted that now, over time were very favourable to investors. Often Governments have a very much narrower horizon than the investors do and that creates an arbitrage. So yes we have seen roads privatised that with the benefit of hindsight have proven very, very good investments.

MP: And it’s less likely to see those in the future.

IS: I think one can presume that there will be learning on the side of the Governments that are selling these assets. Whether they will learn to the point that the upside is totally eliminated, I doubt it.

ENDS