HEAD-TO-HEAD: First State vs Partners Group

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Fatima Khizou, manager research analyst at Morningstar, in her annual fund report, writes that the First State managers’ bottom-up approach aims to balance value and quality.

The process involves detailed fundamental analysis and a ranking process based on several valuation models and metrics to determine the stocks’ long-term fair value. It also includes analysis of management criteria and barriers to entry.

The fund invests primarily in operators of infrastructure assets in developed countries. The team is “mindful of macroeconomic and geopolitical risks”, Khizou writes, mitigating it through diversification across countries and sectors.

The fund has a 47% exposure to US equities, compared to 34% average for the category, and only 8% to emerging markets, compared to the category’s 11%. It holds 85% of assets in large-cap stocks, compared to 73% average for the category.

The mandate allows the fund to invest up to 20% in emerging markets. Before 2012, EM exposure was around 3% of the portfolio. The management team took little exposure due to their perception of geopolitical and regulatory risks, combined with the value approach. However, emerging market exposure has increased since 2014 to about 8%.

The fund is tilted toward sectors expected to show growth, such as operators of toll roads, railways and mobile towers. It has recently increased its allocation to pipelines and reduced electric utilities.

By comparison, the Partners Group fund is focused on core infrastructure – owners and operators of infrastructure that have a state-sanctioned monopoly status in their markets. Such monopolies tend to be tightly regulated. This investment approach avoids the risk of competition, while retaining political and regulatory risk.

In conversation with FSA, Prabal Sidana, the portfolio manager and Markus Pimpl, head of liquid private markets investment solutions at Partners Group, described the investment process as a combination of top-down and bottom-up approaches.

A clear understanding of macro developments, as well as regulatory and political environments, is a crucial part of the strategy.

The investment process identifies companies with monopolistic features and visible revenues.

The management team takes a long-term investment approach. A typical holding period is three years, but some investments have been held since the fund’s inception.

Investment decisions are discussed in the management committee, with the final say belonging to Reto Munz, managing director and head of liquid private markets, who is also responsible for the firm’s listed private equity strategy.

The firm contacts the management of companies on average once per year. Investments are also reevaluated once per year, although the management team monitors relevant daily news.

The team invests in both developed and emerging markets, in order to differentiate its growth drivers, what the manager refers to as a “defensive diversification philosophy”. It has a 39% exposure to North America, 38% to Europe including the UK, and 9% to Asia.

The firm has recently built up its position in seaports, which the managers believe have attractive low valuations. Exposure was also added to wireless communication towers in the US, in expectation of further growth with new auctions of mobile spectrum in the near future. The fund managers have also taken profits on regulated utilities, as their valuations have peaked and the team sees no catalysts in the next year.

Both funds hold around 40 stocks, with the First State fund holding larger positions, above 5% each, in its top six holdings. The largest position in the Partners Group fund accounts for 4.7% of the assets, with the remaining ones below 4% each.

In regards to ESG, First State does not screen companies on ESG criteria, but seeks to understand the risks and capture them in its proprietary quality ranking, according to the firm’s website.

Partners Group is a signatory of Principles for Responsible Investment and implements ESG considerations in its process, which is essential in order to attract European institutional investors, who constitute around two-thirds of the fund’s investors.

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