Given the importance of Australian holdings to the Signature High Income Fund, Signature Diversified Yield II Fund, including corporate class versions, and the Sentry Global Infrastructure Fund, and with Signature as a large investor in Australia (key holdings include Transurban Group and Sydney Airport), I was proud to accept an invitation to a Government of Australia-sponsored conference in Sydney recently.
I listened to presentations from senior cabinet ministers, the governor of the country’s central bank (the Reserve Bank of Australia), other government officials and senior executives. We also discussed a variety of investment themes in a small group environment. While down under, I met with several corporations to get a better sense of investing opportunities for Signature across the funds.
Things are good in Australia. Low government debt and deficits, well-capitalized banks, low inflation, international trade growth, high levels of foreign investment, low unemployment, a government pursuing corporate tax cuts... Australia has its house in order.
Much like Canada, while Australia was not immune during the Global Financial Crisis (GFC), fiscal stability and a Chinese-led resource rebound kept Australia relatively strong, without needing to resort to unconventional policy items such as quantitative easing or negative interest rates.
In his address to our small group, Reserve Bank Governor Philip Lowe focused on the country’s uniqueness and that just as its interest rates “did not move in lock-step on the way down, we don't need to do so in the other direction.” This provides an interesting backdrop for income investors like me. With an opportunity to invest in infrastructure and real estate assets in a growing economy with restrained interest rates, Australia should remain an attractive destination for income-oriented securities, as rate pressures may be somewhat lower than in the rest of the world.
The rate backdrop is buttressed by two forces being embraced by Australia – globalization and technology. Given its location, goods in Australia have traditionally been more expensive than most other geographies. However, trade deals have lowered tariffs and allowed retail prices to decline. And with technology, individual Australians are importing cheaper items from abroad. This has limited the pricing power of retailers (the head of Australia Post told our group that parcel imports from China were up 45% in 2017). Given retail sales are approximately 10% of the Australian Consumer Price Index (CPI) weight (with the housing sector, which is also softening, accounting for another 22%), Oz seems like a place that could maintain the non-inflationary growth that income-generating equities thrive in.
Housing: That’s not a (falling) knife
Much like Canada, Australia has seen its housing markets rally post GFC. This has produced concerns about affordability and the impact of foreign investors, along with concerns around consumer debt. Recently, the Australian housing market has softened, producing the inevitable “bursting bubble” narrative that the media loves to highlight. I came away reassured that this is not the case, and with a much deeper appreciation for the complexities on the ground.
As housing pressures have grown, the government has introduced higher transfer taxes and tighter banking regulations to clamp down on speculation (which sounds familiar to Canadians…). As well, due to tighter regulations, the banks are charging higher interest rates to condo investors, and this has produced a bit of softness. However, these policies are designed to restrain demand, and demand itself has not gone away. With growing domestic employment, as well as international investment and a well-capitalized banking system, the preconditions for a deep fall in this market simply are not there, even with large price appreciation. The recent decline is orderly and the broader economic impact is mild.
While some may call this moderate fall a bear market, the Australian variety may be gentler than most…
Signature fund holding: Transurban Group
On a holdings basis, I had time to meet with management of a variety of companies, and want to highlight Transurban, the most valuable toll-road company in the world. Transurban had just reported December 2017 results, with solid cash flow growth and increased dividends per share. I sat down with the Chief Executive Officer Scott Charlton and toured some of the group’s control rooms and roads. Sydney and Melbourne currently have serious congestion issues that require significant investment. Transurban has been able to help with these problems, while making a good return on its deployed capital.
The most important takeaway from the meetings with Scott Charlton and others was the reminder that Transurban (and Sydney Airport) is not a simple bond proxy, held captive to fluctuations in the Australian or global bond markets. Rather, the company and its employees are finding the most efficient way to safely increase traffic, to save time for Australian commuters, and to ensure the roads are functioning at peak capacity. This is how infrastructure is supposed to work – a high fixed asset base allows for cash flow growth at a multiple of revenue growth.
Transurban’s average daily traffic grew by 1.2%, but its revenue grew by 10% and its operating cash flow (earnings before interest, taxes, depreciation and amortization) grew by 11.2%, allowing it to increase dividends per share by 10%. When I talk to clients about the ability of our infrastructure companies to perform well despite higher rates, this is what I am focusing on. When a company such as Transurban has a 5% dividend yield, growing dividends at 10% per year, and has 3.6 million customers that find its product indispensable, I feel confident that the quality and durability of those visible cash flows can provide income solutions for investors through any environment.
In closing, I want to thank all of our partners for their continued support in the Signature High Income Fund, Signature Diversified Yield II Fund, including corporate class versions, and the Sentry Global Infrastructure Fund. We strongly believe that these funds can and will continue to provide Canadians with strong diversification and income for their portfolios. We understand these are complicated times and the markets can misbehave. The Signature Global Asset Management team remains committed to communicating with advisors and clients as new developments arise. Advisors are welcome to contact the CI Sales Team if you would like to connect further.
All the best,
This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This commentary may contain forward-looking statements about the fund, its future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.