Miller/Howard Investments
Miller/Howard Podcast Questions
Miller/Howard Infrastructure
Bryan J. Spratt, CFA, Portfolio Manager  |  Full Bio (PDF)

What is Infrastructure?


At its core, infrastructure can be defined as the essential services and foundational assets in society that make up the backbone of the economy. When you think about your home, it's hard to imagine not having electricity, heat in the winter, or air conditioning to stay cool in the summer. When you think about going from place to place, the transportation infrastructure is the backbone, whether it be the highway system or bridges, supported by all of the energy infrastructure that is required just to fill up your gas tank.

Finally, infrastructure includes logistics, which are the hands and feet of e-commerce. Everybody talks about the impact of online purchasing on brick-and-mortar retail companies, but without the transportation and logistics network, e-commerce wouldn't be a possibility. These are some of the categories and areas that we focus on in the Miller/Howard Infrastructure portfolio.

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What are some of the concerns?


When President Trump was elected, there were all kinds of headlines talking about how hugely positive he would be for infrastructure, and yet infrastructure sold off initially. Traditional, core foundational asset ΜΆ type essential services companies sold off because interest rates went up on concerns of potentially higher government deficits. Enablers, companies that should directly benefit from faster growth and more stimulus around infrastructure spending, moved higher following the election.

As an example, MDU Resources, a Rockies-based utility that also has construction services and construction materials like gravel, asphalt, and cement, is a direct beneficiary. We had a high portfolio weight in the stock and we allowed it to run after the election. We eventually took profits when we felt it was overbought technically and fully priced. When we saw that the stock price came back down, we added it back to a full weight.

We also took profits in some of our other enabler companies at a time when everybody was talking them up. We allowed them to run for a while before we took profits, and we redeployed the proceeds into more conservative names. Shortly after the election, when utilities were one of the hardest hit in the group, we added ahead of a very nice recovery. We recently took profits in some of the utility categories that we deployed into other areas. This dynamic allocation is a key feature of the infrastructure strategy, and it can be a powerful alpha generator.

One of the apprehensions about investing in infrastructure is the perception by some investors that you're sacrificing return potential for safety. We disagree, and we have demonstrated that you don't have to sacrifice return. Importantly, you can get a very different payout pattern and lower correlation. We think that's a good thing, and we offer a portfolio that is currently yielding substantially higher than the broad market, positioned to grow the dividend, and regardless of politics and policy, clients have an underlying group of financially strong companies that are paying a healthy cash flow stream today and positioned to grow tomorrow.

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Why does an infrastructure strategy make sense for retail and institutional investors?


We're finding most institutional consultants have created real assets in infrastructure categories and their overall asset allocation recommendations. The overall industry is seeing fund flows into the infrastructure space, and we think institutional consultants are leading that. On the retail side, whether I'm talking with friends, family, or prospective clients, I often say that if you're going to make a change in your portfolio it needs to bring something to the table.

I believe it's important to add an infrastructure allocation. We believe that our infrastructure strategy offers attractive cash flow in the form of dividends, also provides visible growth in the form of earnings, cash flows, and dividend increases. There are many qualitative reasons when you think about the physical tangible nature of these assets and the durable business models that these companies represent. As an example, if you were to lose your job, you wouldn't go home and unplug the freezer or cancel your phone service, whether it be a fixed line, cell, or data coverage.

These qualitative aspects of essential companies bring something very positive to the portfolio, especially if you see risk in the equity markets now that we are over eight years into a pretty dramatic recovery. What's more, the current recovery is built on unprecedented quantitative easing, not only at the US Federal Reserve, but at global central banks around the world. We would suggest if you're going to own a healthy position in equities, like many long-term investors do, why not increase the more defensive, conservative, and foundational type infrastructure assets in your portfolio.

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Do politics matter?


This is a highly regulated, capital intensive, and very long planning cycle segment of the economy. So you can't get around the fact that politics plays a role. Clearly, the current administration has highlighted infrastructure as part of the pro-growth agenda and has made certain changes that I think have been supportive. Having said that, there was already a significant amount of groundwork in place when you think of renewables and the explosive growth that we've seen in this country.

The US is an emerging market, if you will, in renewables simply because we have 30 separate states and Washington, DC that have different renewable portfolio standards and tax incentives that encourage the use of renewables. Production tax credits and investment tax credits for solar and wind were already in place to provide a multi-year tax sponsored, tax stimulated program to build out more renewables in this country.

In the communications area, there are some possible changes that could occur because of new leadership and staff at the FCC. We'll have to stay tuned on that. But issues such as net neutrality and the policy around it could have a pretty profound impact on the winners and losers in the future. The policy resolution is not exactly obvious, but we think it's reasonable to expect the companies that have spent significant amount of capital in positioning themselves will benefit. We have positioned the portfolio accordingly.


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