Argo’s loyal shareholders and broker clients are being offered the opportunity to invest in a new listed investment company, Argo Global Infrastructure Limited. This will be quoted and traded on the ASX, under stock code ALI.

This is the first Australian listed investment company or listed managed fund to offer exposure to global infrastructure assets.

The case for global infrastructure

The Australian listed infrastructure sector is well known to investors, with companies such as Sydney Airport, Transurban and APA. Privatisation has played a key role in its development.

It is quite narrowly based compared to the global infrastructure sector, as it is dominated by utilities, toll roads and airports. In addition to the wider variety of sub-sector opportunities available offshore, Australia is ahead in the ‘privatisation game’, meaning that there are going to be more interesting investment opportunities offshore as privatisation initiatives take shape.

According to the portfolio manager (see below), there are only 15 listed infrastructure companies in Australia with a combined market cap of around $72 billion. Globally, the universe is 350 companies worth around $4.6 trillion Australian. Approximately 50% (by market cap) are based in the USA, with country and sub-sector breakdowns as follows:

Indicative Country Weighting

Indicative Sub-Sector Weighting

Source: Cohen & Steers

Potentially, investing in global infrastructure assets offers exposure to attractive and stable income returns, strong total returns, low volatility and low correlations to broader equity markets. Further, significant growth in the breadth of listed investment opportunities is expected to occur, driven in part by historical underinvestment in infrastructure, and a growing reliance globally on private industry to provide infrastructure services.

The company

Argo Global Infrastructure (ALI) will invest in an actively managed portfolio of 50 to 100 securities, with 80 – 100% of the portfolio in global listed infrastructure securities and 0 – 20% invested in global infrastructure fixed income securities. Up to 5% of the portfolio may also be held in cash securities.

The portfolio will generally be unhedged for currency movements – although the company may initiate a defensive hedging strategy if it sees a significant risk of currency weakness (in this case, Australian dollar strength).

Argo has appointed Cohen & Steers Capital Management to manage and invest the portfolio.

The portfolio manager

Cohen & Steers is a NYSE listed fund manager, managing around $A71.1 billion in assets. In infrastructure assets, it manages around $A5.7 billion.

It uses a balance of top-down industry sector and sub-sector research, combined with specific bottom-up company analysis. The team that will manage ALI boasts a fairly impressive track record. According to the Product Disclosure Statement, the two immediately comparable funds managed by Cohen & Steers have outperformed their benchmark indices over all time periods to 31 March 2015.

Cohen & Steers will be paid half the total management fee, with the other half to go to subsidiary company of Argo Investments limited, Argo Service Company Pty Ltd.

All up, the management fees are based on a sliding scale depending on the size of the portfolio:

• 1.20% pa on the portfolio value, up to and including $500 million;
• 1.10% pa above $500 million up to $1 billion;
• 1.00% pa above $1 billion.

The offer

Argo is looking to raise up to $600 million, via the issue of 300 million shares at $2.00 each. Investors can apply for a minimum of 1,000 shares ($2,000). A minimum subscription amount for the offer to proceed has been set at 100 million shares ($200 million).

Investors who take part in the IPO will be issued one option for each share subscribed. The options can be exercised at any time up until 31 March 2017, by paying $2.00 to the Company for new shares. The options will be listed, and trade on the ASX under the code ALIO.

Due to issuing costs (essentially a placement commission to the selling brokers of 1.5% and joint lead manager costs of around 1.1%), the $2.00 shares will have a Net Asset Value on listing of around $1.967 (range of $1.966 to $1.967).

Key dates are:

• Offer Closes: 19 June
• Trading on ASX Commences: 3 July
• Expiry date for options: 31 March 2017

Offer sweeteners

Argo Investments (the listed investment company) will be investing $25 million of shareholders’ money. This is nice – however on a portfolio of around $5 billion – represents a tiny 0.5%. It won’t have any meaningful impact on portfolio performance.

The second sweetener is the “free” option. It costs nothing to issue, and is meant to help defray the “perception challenges” about investors paying $2.00 for a share that is really worth $1.967. The option, of course, has a time value – and maybe with the share, the combined value of the two will be worth more than $2.00 on listing.

Because the options are, if exercised, dilutive, this will limit the potential for upside growth in the share price until March 2017.

Bottom line

Global infrastructure is certainly an interesting asset class, and ALI is an easy way to invest in it. While it doesn’t quite tick all the “reason” boxes for investing offshore like investing in offshore shares does (we simply don’t have companies like Apple, Google or Pfizer in Australia – whereas we do have toll-roads, airports and pipelines), Argo makes a pretty strong case as to why the investment makes sense. It is certainly very hard to argue with the track record of the portfolio manager Argo has selected to partner with.

A limitation is that it is only investing in listed infrastructure securities – there is no doubt another world of unlisted infrastructure assets to invest in.

And while this shouldn’t be a reason not to invest, because the underlying assets are offshore assets and ALI is carrying a deferred tax asset, dividends from ALI won’t be up there in the franking credit league table.

The management fee is also on the high side. It is clear what the portfolio manager is being paid for – less clear why Argo Services is getting the other half of the fee. These aren’t the only costs – the company (shareholders) will also incur other costs, such as director fees.

Invest now or invest later? Personally, I hate paying a premium to invest (sometimes, you have to do this to cover costs like stamp duty – however, paying for someone to sell something to you goes against the grain). The option will have a value upon listing – so maybe it is line ball.

It is worth considering, as a component of your offshore allocation. To invest, contact your broker or go here.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.