Q:  What is your investment philosophy? A: We believe that globalization is driving infrastructure spending around the world. We designed our fund to take advantage of this trend in two ways. First, by investing in companies that are generating stable cash flows through existing infrastructure projects and second, by investing in companies that will benefit from the build out of new infrastructure assets. Today there’s a liquid market in infrastructure securities available to investors, comprised of a diverse group of companies involved in the ownership, management, and development and/or financing of essential services for the advancement of communities around the world. Within this broad universe of infrastructure securities, we believe that there are two dominant investment themes. First, there are mature infrastructure investments in companies involved in traditionally monopolistic industries with long life assets, such as electric utilities and airports. These companies’ predictable, inflation-linked cash flows offer a low-risk and moderate return profile that is typical of hard asset investments. Second, companies focused on infrastructure development will benefit from the surge in spending expected for new structures and services – particularly in emerging markets where demand for new infrastructure is most dire. While these investments can carry more volatility and development risk than those focused on mature infrastructure assets, we believe that companies involved in the buildout of basic structures provide an important growth-oriented component to a diversified infrastructure allocation. Q:  What benchmark do you measure yourself against? A: We benchmark this fund to the S&P Global Infrastructure Index. This is an adjusted market cap weighted benchmark with 40% in utilities, 40% transportation, and 20% energy. The benchmark is typically very asset-heavy and more focused on mature infrastructure and less on the development side. Thus, we further define infrastructure to include communications and capital goods (i.e. construction and engineering, raw materials) companies. We certainly want to own mature infrastructure assets but we also want exposure to the development side – that’s where some of the capital goods companies come in. We expect that companies outside of our benchmark in the communications and capital goods sectors may comprise 5-20% of the portfolio under normal market conditions. Q:  How did you come up with the idea of this fund? A: Kensington has a long history in real estate securities investment management. We think infrastructure is a natural extension for our company because it’s typified by long life assets and stable cash flows. In fact, we found that a number of companies we were covering on the real estate side had exposure to infrastructure assets, which is what initially piqued our interest in the asset class. It has many of the same appealing characteristics as real estate investing, not least of which is low correlation to stocks and bonds. A broad theme supporting investment in this space is the fact that sustainable economic growth over the long term will require increased spending to maintain existing infrastructure assets and develop new infrastructure. If you under fund it, it cuts into GDP growth. In the U.S., discretionary spending as a percentage of the federal budget has declined from 70% to 30% over the past 40 years. Items like infrastructure spending have suffered as a result and in many countries governments lack the will or ability to raise taxes. So, today, we are seeing the public sector increasingly look to private enterprises to help close the infrastructure spending gap. Q:  Do you focus on any specific geographic location? A: This is very much a value-oriented approach focused primarily on developed markets around the globe, so our geographic exposure purely depends on where we find the best risk-adjusted return opportunities within that scope. We believe that both short and long-term country-specific risks are important to consider in global investing. We use beta as a proxy for short-term risk, while other more qualitative factors must be considered when determining longer-term risk. We adjust for these factors in our dividend discount model, with each country assigned a country risk premium based on six key metrics: political, economic, tax, legal, operational and security. Our exposure to developed markets will typically be 70% or greater. The share to emerging markets will be 30% or less. Right now, U.S. companies comprise approximately 20% of the portfolio. If more public assets find their way into private hands, increasing the market capitalizations of companies in certain countries, it can affect the weightings within the benchmark and within our fund. Q:  Could you highlight your investment process? A: We use a quantitative, bottom up process to analyze infrastructure companies. Our primary metric is discounted cash flow analysis, which we supplement with net asset value (NAV) analysis where appropriate. We also look at secondary measures of value such as price to earnings ratio, price to cash flow, and dividend yield combined with payout ratio. Using these metrics, we arrive at a fair value for each company, and then rank them both relative to their peer group and relative to the entire universe. We actively screen about 300 companies for this fund, which includes the 75 benchmark S&P Global Infrastructure Index names. We target exposure to the benchmark of roughly 80% or more. We then cull through the roughly 225 names that we follow closely outside of the benchmark and look to invest approximately 20% of the fund in those names. In that way, we can provide exposure to sectors such as communications and capital goods companies, which are not part of the benchmark, but in our view, are a meaningful part of the global infrastructure story. We look to own the cheapest names from amongst the different industry groups -- we definitely have a value focus. In addition, on the qualitative side, we examine both country risk and past operating history to better understand the risk/return potential of the security. Key operating metrics include margin and revenue trends, cash flow and dividend growth, and the overall quality of earnings and management’s abilities. For example, if we believe that a particular utility is cheap but it looks highly leveraged versus the peer group and it’s in a country that we expect to see large, unfavorable interest rate movements, then we might skip that particular name. Q:  Do you prefer to invest in emerging markets or prefer to keep your exposure to developed market? A: While there will be an element of emerging market exposure in the fund, we prefer to gain exposure to emerging markets through higher quality, liquid companies that are domiciled in developed markets and trade on larger exchanges. For example, Abertis is a Spanish toll road operator with operations throughout South America. We prefer to get exposure to the toll roads in South America through a company domiciled in the EU with high transparency, rather than take a direct risk in some of the more volatile South American markets. Q:  What are the industries that attract your interest? A: The five broad categories that we look to invest in are transportation, communications, energy, utilities and capital goods. The transportation segment is comprised of ports, toll roads and airport companies. We see a lot of value in this group today. When you look at where transactions are happening for individual assets, particularly in the airport and toll road areas, you see private transactions happening at multiples in excess of where the stocks are trading, indicating that the stocks are trading at discounts to their underlying asset values. In the energy segment, we believe that shipping and pipeline companies will benefit from an environment in which oil production is ramping up. These companies are typically less volatile because production doesn’t move around as much as commodity prices. In the utilities segment, we are looking at global utilities like E.ON. As the leading German electric utility, E.ON provides exposure both to emerging Eastern European markets and to stable operations within Germany. As for communications, we believe that one factor that is likely to spur growth in wireless telecommunications companies is the fact that in many places in the world, extensive telephone networks may never be established, but instead will be replaced by widespread mobile phone use. While there are instances of low cell phone penetration rates in certain parts of the world, overall, this is a rapidly growing phenomenon. In the capital goods segment, we are focused on companies that help to build infrastructure assets. Equipment companies, for example, have a slightly different risk profile because they may or may not have a hard asset component. Instead, these companies will have higher leverage to economic growth. Q:  How is your research process organized? A: We categorize the roughly 300 stocks that we closely follow into their respected sectors, industries and sub-industries and then we rank them relative to one another using discounted cash flow as the primary metric, supplemented with NAV. Then, we look at secondary measures of value which can include price to earnings, price to cash flow, dividend yield and payout ratios. We model out the next three to five years of cash flow for each company. Using adjusted discount rates reflecting the local risks for each country, we develop earnings potential for each of these companies. Using these earnings, we generate a list of fair values for each of the companies that we monitor. We also develop a ranking of risk and return measure for each of these companies. Based on these rankings, we construct the portfolio. Q:  How many positions do you generally have in the fund? A: Generally, we expect to have between 50 and 65 names in the fund. We will typically own about 40 of the 75 names within the benchmark, and between 5 and 20 names from outside the of benchmark. Q:  Could you give some examples of your stock picks? A: Abertis Infraestructuras S.A. in Madrid, Spain is a good example. It has over 1,500 kilometers of toll roads that generate over 80% of its operating cash flow. We like the company because it earns an attractive return on its invested capital versus its weighted average cost of capital and because it provides exposure to some of the growing South American markets. We like the toll road assets because they are trading at a discount to private market valuations. Q:  How do you add value to the benchmark? A: The additional return is generated in two ways. First, by selecting the 40 or so most compelling ideas from the benchmark using our quantitative, value-oriented approach to stock selection. Second, from owning infrastructure assets that are not in the benchmark such as the capital goods and the communications which, again, are an important part of the global build-out of infrastructure, but are not represented in the benchmark. When we initiate a position in any of the securities that we like, we are adding to the position incrementally. Generally, the maximum exposure to one company is 10%. Q:  What drives your sell decisions? A: All of the stocks we cover are ranked in a real-time model relative to one another, relative to the entire peer group and then relative to the universe of stocks that we follow. Two things cause a movement in the rankings; stock price changes and changes in estimate of a company valuation. We own the names that screen at the top of their groups and if it is no longer screening well, then we look to sell the position. We model everything with a three to five year estimate of cash flow, helping us to target an annual fund turnover of approximately 60%. Turnover will be impacted by price volatility and fundamental changes at the company level. Q:  What kinds of risks do you monitor and what do you do to mitigate them? A: As long as the global economy is healthy, investment in infrastructure will continue. A global economic slowdown is obviously not going to be helpful for the group. Many of these companies use leverage on their balance sheets, thus, a meaningful up tick in interest rates would have an impact on the valuations for the group. A lot of them operate under regulatory scrutiny, which can make their cash flows more predictable. Depending on the direction of the global economy (of which we have a fairly constructive view currently), we have ways of getting more or less defensive within this space. Infrastructure as a group includes defensive companies with relatively low volatility versus global benchmarks. Capital goods companies, on the other hand, rely on strong economic expansion. Q:  Could you comment on the growth rates in the companies at a macro level? A: In terms of the risk-return spectrum, real estate has historically been a low risk and relatively low return vehicle. The high degree of predictability in earnings and high degree of visibility lowers the risk compared to other asset classes. Based on the stocks’ profile, we believe that infrastructure will have higher degree of risk than real estate but that they ultimately will generate higher returns than real estate as the global economy grows. However, the returns in infrastructure stocks tend to be lower (and less volatile) as compared to broader global equities indexes. In terms of the companies in the Kensington Global Infrastructure Fund, we are looking at yields on the underlying companies over 3%, payout ratios from earnings under 50%, price to earnings of 15 to 16 times, and three year compound annual growth rates in earnings per share of about 8%. We believe that the risk-adjusted return potential of infrastructure companies are very compelling, which explains our focus on this burgeoning asset class.