LIGHTHOUSE INVESTMENT PHILOSOPHY

Lighthouse Infrastructure's overall investment philosophy is best described as 'bottom-up', with a fundamental 'value' bias.

Markets misprice assets from time to time. This mispricing allows Lighthouse to take advantage of these opportunities and invest successfully on a risk adjusted basis. Underlying this philosophy is both a thorough understanding of intrinsic value and a realistic assessment of the rationale for price swings away from fair value. Lighthouse has observed that over a long period of time various infrastructure securities can trade at a discount to fair intrinsic value of more than 30% in extreme cases.

Large infrastructure projects and the companies that manage these projects are typically large and complex, as is the environment in which they operate. As a result, properly understanding the true value of an infrastructure security requires detailed and rigorous analysis.

Lighthouse Infrastructure begins its analysis of infrastructure securities using in-house financial models and qualitative measures that build an understanding of the fundamental drivers of a security's performance. Using this information, Lighthouse Infrastructure makes an assessment of a security's intrinsic value.

Lighthouse's investment process involves the identification of securities within its investment universe that are trading at a discount to their core intrinsic value and offer superior returns on a risk adjusted basis. Within the Infrastructure universe Lighthouse determines those securities that match the definition of economic infrastructure securities and eliminates those securities that do not fit its criteria of "essential" or "monopolistic" assets.

Securities that meet these criteria are included in Lighthouse's investment universe. Once a security is defined as within Lighthouse's investment universe it is researched and ranked for valuation.

While the selection of securities within the investment universe occurs from a fundamental bottom-up, DCF-based valuation methodology, Lighthouse undertakes further analysis in order to determine the portfolio weightings of securities. In addition to this 'bottom-up' analysis, however, is a top-down approach that considers broad macroeconomic factors and the impact that these are likely to have on the particular security being analysed. For example, economic measures such as inflation rates, GDP growth and interest rate levels are all likely to have some impact on the value of an infrastructure security.

After considering all 'bottom-up' and 'top-down' analysis, Lighthouse Infrastructure identifies securities that are undervalued by the market, both in terms of their individual intrinsic value, and in comparison to other similar infrastructure securities.

Lighthouse undertakes "Conviction Analysis" to summarise its view of the strength of the investment case taking into consideration a number of variables outside of those that are implicitly part of the valuation process. The conviction analysis is implicitly designed to take into consideration the potential risks associated with the investment decision as well as potential options that may provide an upside skew but are not inherent in the intrinsic valuation. The conviction is effectively a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) on a company as well as a macro level. The following variables are taken into consideration:

  • Management capability - skill, integrity, transparency
  • Defensive characteristics (Inflation hedge, exposure to real interest rates)
  • Existence of imbedded options (concession extensions, pre-emptive rights)
  • Security demand (Overhang, Buy-back, takeover potential, history of capital raising)
  • Financial - Yield sustainability, balance sheet strength and dividend/cashflow cover
  • Valuation relativity and correlation to peers

Unlisted Assets

Unlisted infrastructure assets are typically existing or new infrastructure projects, and can often involve complex financial structures.

Lighthouse believes that investment in unlisted infrastructure assets will provide returns from opportunities that are not otherwise available in the listed market.

Lighthouse's philosophy is to invest with a long term horizon and will add value through being an active and specialist manager.

Lighthouse segments the Infrastructure Investment Universe as follows:

Economic Infrastructure

  • Transport Infrastructure - Road, Rail, Airports, Ports, Logistics
  • Communications Infrastructure
  • Utilities - Gas, Electricity, (Clean Energy - see below), Water

Clean Energy Infrastructure

Clean energy is electricity or other consumable energy produced from renewable, waste or inherently low emission sources. On this basis, investment by The Fund in clean energy includes energy generated from the following:

  • Renewable sources (wind, hydro, geothermal, biomass and solar);
  • Waste gas (landfill gas, biogas, process gas); and
  • Natural gas and coal seam methane.

Social Infrastructure

  • Health, Retirement, Education

For a detailed analysis of the investment philosophy of Lighthouse please e-mail the Company.