Miller/Howard Investments
Miller/Howard Infrastructure Series
Part 3: Investor Concerns, Investor Benefits
What are current concerns? What are current and long-term benefits?
Bryan J. Spratt, CFA, Portfolio Manager/Research Analyst  |  Full Bio (PDF)
Part 1: Infrastructure
Part 2: Why Infrastructure?
Part 3: Investor Concerns, Investor Benefits

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.

The design of the strategy gives us the flexibility to dynamically allocate among the different categories of infrastructure. We are constantly looking at absolute and relative valuations across the different groups and within the groups to make comparisons and assessments and trying to weigh the risk reward profile in the growth opportunities. All of those dynamics play into how we allocate capital among the different groups in the infrastructure strategy.

As an example, the last couple of years have been a pretty volatile time for utilities. Utilities historically [as a sector] has been less volatile than the broad market, but because of some of the sudden shifts in long interest rates, volatility in the sector has occurred. This period includes both leading up to the [US] Fed's tapering talks and then the beginning of the Fed rate hikes.

But this has created both challenges and opportunities. We've had the ability to raise and lower the allocation to utilities as these different dynamics occurred. We've been able to navigate the volatility, doing a pretty good job of taking profits after nice upward moves, and redeploying capital when we see an oversold situation. We like the flexibility. Dynamic asset allocation has provided some nice alpha generation for the strategy over time.

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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