While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
Toll roads, everyday needs offer ‘true’ inflation hedge
The near $1 billion Martin Currie Real Income Fund has been preparing for an outbreak of inflation since 2021, according to Ashton Reid, Portfolio Manager of the domestically focused strategy. In a recent note, Reid discussed the group’s discussions with management in the latest reporting season, noting a ‘shift in the business community’s thinking about inflation’.
Most executives now expect inflation to accelerate for the rest of the year, something that will require investors to ‘adjust their thinking’ Reid said. One sector of the economy that is generally underappreciated for its diversification benefits are so-called ‘real assets’ that include anything from property to toll roads and airports.
While not immune from the impact of labour force and supply chain issues, assets including shopping centres and regulated utilities ‘can benefit from inflation pass-through mechanisms’. Most of these companies have well known income links to the rate of inflation, but what is less appreciated is the difference between those companies with ‘pricing power’ and those without.
The decision to increase fees and charges may be an easy one, but the big challenge for investors is understanding “to what extend consumer demand will be affected by companies passing on costs in an inflationary environment”. That is, how elastic demand for these products and services may be.
Among the best examples of this are two of Australia’s most well known assets, Transurban toll roads and Scentre’s shopping malls. Commenting on the former amid concerns that toll increases may crimp demand, Reid said “our view is that Transurban’s higher toll prices remain affordable in the context of inflation-driven rice increases. People are more likely to pay higher tolls than spend longer on crowded un-tolled roads,” Reid says.
The story is very different with Scentre Group, which operates regional and super regional shopping centres around Australia. The group has naturally been a beneficiary of the end of COVID restrictions, with improving foot traffic and tenant sales recovering translating into more demand for space and higher rents. Yet the group has made an active decision to avoid ‘less inflation protected CBD-based office assets’ preferring to focus on ‘everyday needs assets’ such as these regional malls. Primarily because of the replacement costs and limited alternatives in the regions.
In what may be a sign of the challenge facing real asset investors in Australia after another few infrastructure companies were taken private, the group has varied the mandate of the Real Income strategy. Specifically, the managers will now be able to invest as much as 20 per cent of the portfolio in companies listed outside of Australia.
