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Is the Magellan Infrastructure Fund (ASX:MICH) share price a buy?

Urban Infrastructure

Is the Magellan Infrastructure Fund (Currency Hedged) (ASX: MICH) share price a buy?

It’s an active exchange-traded fund (ETF) that invests in global infrastructure. It’s currently an ASX share rated as a buy by the Motley Fool Dividend Investor service.

What’s an active ETF?

Not every ETF is passive that just follows an index. Typical ETFs such as Vanguard Australian Shares Index ETF (ASX: VAS) just aim to follow the ASX 300.

But there are some fund managers that offer their funds in an open-ended fund structure that can be invested in via the ASX. The key difference is that fund managers are the ones that are making the share picks, rather than an automatic index weighting.

Which manager manages this ETF?

The Magellan Infrastructure Fund is managed by Magellan Financial Group Ltd (ASX: MFG), which has billionaire investor Hamish Douglass as the chair and chief investment officer.

Magellan is best known for being an investment manager that focuses on international shares, with $78.3 billion of funds invested with Magellan’s international strategy. However, Magellan has also $17.86 billion invested in infrastructure shares.

The actual Magellan Infrastructure Fund is managed by Gerald Stack.

What does Magellan Infrastructure Fund aim to do?

According to Magellan, it aims to hold 20 to 40 shares and tries to deliver the stable returns offered by the asset class, while protecting returns from currency movements.

Magellan says that the infrastructure asset class is characterised by monopoly-like assets that face reliable demand and enjoy predictable cashflows. Potential investments that meet these criteria are expected to achieve strong underlying financial performance over medium- to long-term timeframes, which should translate into reliable, inflation-linked investment returns.

Magellan has a particular process for identifying infrastructure. The underlying business must provide a service that is essential to the efficient functioning of a community, while generating cash flows that are not subject to external risks such as commodity prices. Magellan also evaluates other criteria, such as gearing levels, sovereign risk, regulatory risk and reporting transparency, which, if failed, will result in exclusion from the investment universe.

The fund manager believes that by excluding businesses that fail to meet these criteria, the universe consists purely of companies that enjoy reliable demand and generate predictable cash flows. This analysis includes evaluations of a company’s external environment, its business-specific issues, its historical financial performance and its valuation.

What shares are in the fund?

In its latest monthly update, Magellan Infrastructure Fund said that its largest 10 holdings, in alphabetical order, were: American Water Works, Atmos Energy Corporation, Crown Castle International, Enbridge, Eversource Energy, Red Electrica Corporation, Sempra Energy, Transurban Group (ASX: TCL), Vopak and Xcel Energy.

At 31 October 2020, it also had a cash position of 10% of the portfolio.

Whilst USA shares represents the biggest country allocation, it’s less than half of the portfolio at around 42%. Europe, Canada, Latin America, the UK and Asia Pacific are also represented.

How has it performed?

Magellan quotes its returns as net returns, which is after the fees – including the management fee of 1.05% per annum.

Over the past four years, the Magellan Infrastructure Fund has returned 5.5% per annum, outperforming the S&P Global Infrastructure Net Total Return Index by an average of 4.2% per annum.

Is the Magellan Infrastructure Fund share price a buy?

It’s currently trading at a slight premium to its intraday indicative net asset value (NAV) per unit of $2.9165.

The fund is still rated as a buy by the Dividend Investor service who said it’s “a good investment idea for those looking to benefit from exposure to listed, global infrastructure. It’s a simple and easy solution for those looking to diversify their investments, providing a nice hedge against some of the more volatile stocks elsewhere in the market.”

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Magellan Infrastructure Fund. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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