Alt Investments
Why Darwin Investment Managers Is Boosting Railway Exposure
UK-based
Darwin Investment Managers has built up its exposure to
railways in its portfolio, and explains the rationale behind such
an approach in the latest “Perspectives” report.
The first and second largest equity positions in Darwin’s
portfolio are US railway company Kansas City Southern and West
Japan Railway, respectively. The remaining exposure is through
Japan’s largest rail operator, East Japan Railway, and manager
and operator of the Channel Tunnel, Eurotunnel, bringing total
exposure in the portfolio to just under 5 per cent.
Such railway investments have been structured so as to minimise
risk and maximise exposure, said the firm. That they have high
capital costs but low energy costs, relative to other transport
stocks, suggests these investments would benefit from a world
where energy costs will move higher in the long term, which the
firm sees as a probable scenario.
Similarly, Darwin stresses the investments’ common
characteristics which are particularly favourable, such as high
fixed asset bases with long-term funding structures, captive and
growing customer bases, and revenue lines sensitive to inflation
and economic growth. These are particularly appealing features
considering moves by central banks to pump money into the system
to create inflation and economic growth in a world of low funding
costs, said the firm.
But how the investments differ is their individual contributions
to total portfolio risk. Eurotunnel is the largest contributor to
risk, which is mainly a reflection of its high volatility profile
and this drives the decision to keep the weighting small.
Likewise Kansas City Southern contributes meaningfully to risk,
although this is a function of its higher weighting as well as a
medium to high volatility profile.
In contrast, the two Japanese positions behave as diversifiers of
risk in that they detract from the contribution to total
portfolio risk. Their correlation with the rest of the portfolio
is therefore limited and their volatility profiles are low.
Such differing stock-specific characteristics between each
investment is what allows Darwin to build a larger position in
the portfolio, without distorting risk, concluded the firm.