RARE Infrastructure, which doubled its FUM from $834 million to $1.53 billion in 12 months, is buying up more assets in India and Mexico within its emerging markets portfolio.

Sarah Shaw, senior investment analyst & portfolio manager – emerging markets at RARE, expects to almost double the fund’s exposure to Mexico and India this year, from their respective 5 per cent and 4 per cent.

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RARE Infrastructure has won a $200 million global listed infrastructure mandate from Colonial First State.

Matthew Dell, head of retail distribution at RARE Infrastructure, said the $200 million mandate was awarded following CFS’ review of their global listed infrastructure fund, which is part of their multi-manager suite of products.

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Top news stories in a global context included the Copenhagen summit, Abu Dhabi’s bail out of Dubai, the Tiger Woods saga, UK tax increases, Citigroup capital raising to repay TARP monies, banker bonuses – size and how they’re to be paid/taxed, Harvard’s toxic interest rate swaps and Greece’s credit downgrade.

Infra Regulation. Fraport (airport) announced an agreement with airlines for a 12.5% prices increase over two years. Aeroports de Paris (AdP) proposed a tariff freeze for 2010 in return for lucrative changes to its regulatory model. Ofgem released its final UK electric distribution networks determination with a 4% (post tax real return on assets) and forecast that companies could earn up to 11% return on (regulated) equity. FERC (US energy regulator) launched an investigation into a number of gas transmission pipelines that appear to be over-recovering costs to the detriment of customers. A draft version of the US rail re-regulation was circulated and appears more industry friendly than first thought.

Infra M&A. the Australian Future Fund was rumoured to have purchased 15.6% of Southern Water (UK) from Challenger Infra and has confirmed it is in talks to join the bid for Transurban (tollroad). A Brisa (tollroad) consortium won the Portuguese high speed rail (HSR) project and bidding on the French €10b HSR project closed (with the government to guarantee 80% of the project debt). Macquarie Infra Group distributed documents for their pending EGM vote on a split of the assets.

Infra Funding. Capital markets are open with debt issuance for the month including: BAA (airports) £235m, Auckland Airport NZ$125m, Cintra (tollroads) €400m, Atlantia (tollroads) ¥20b (€149m) and Spark (utility) A$225m. In IPO news, Hochtief pulled the IPO of its Concessions arm and QLD announced an IPO of 60-70% of Queensland Rail (set for Q1’10).

Other Infra News. RiverCity’s (tollroad) Clem7 tunnel is due to open early. Spain’s Public Works has confirmed its commitment to spend ~€250b on transport infrastructure in the period 2005-20. Passengers throughput at key airports improved in November (YoY%); Heathrow +1.1, Gatwick +4.5, Paris -1.3, Frankfurt -0.2, Sydney +7.8. Sydney port volumes were also strong, +7.9 in November YoY.

1. ITC Holdings (ITC): Market Capitalisation US$2.7b
2. Abertis Infraestructuras SA (ABE): Market Capitalisation US$15.8b
3. SES : Market Capitalistion $9.4b
4. National Grid PLC (NG/ LN): Market Capitalisation US$15.8b
5. Shenzen Intl Holdings (152 HK): Market Capitalisation US$1.1bn
6. Vinci SA (DG): Market Capitalisation US$30.8b
7. TransCanada(TRP): Market Capitalisation US$22.5b
8. Northeast Utilities (NU): Market Capitalisation US$4.6b
9. Red Eléctrica Corporacion S.A. (REE SM): Market Capitalisation US$7.4b
10. Spectra Energy (SE): Market Capitalisation US$13.6b

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The big news for November came from Dubai when on the 25th the government sought a delay in debt repayments for the real estate developer Nakheel and its parent company, Dubai World (a large government entity). Dubai fell sharply and many markets followed suit on fears that this was the first of many hidden sovereign defaults. However, although not good news, we don’t think the situation is as serious as first anticipated. We do believe that the situation will be resolved within the UAE although not without the other Emirates demanding their pound of flesh from Dubai – forcing them to restructure and pay the price for over gearing (and over development).

Elsewhere, we saw the first signs of the hinted tightening from the EM economies with China leading the way (has pulled back on its fixed asset investment and started to restrict the level of new loans coming to the market). While this can be considered “quasi” tightening we actually think it may have a more visible impact on China’s demand than traditional monetary tightening measures (high savings rates in China at all levels suggest an interest rate hike will not have the same impact as it would in a developed market). However, the response to date has been measured and slow and we don’t expect significant additional policy measures until the second half of 2010 (timing dependant on the strength of the domestic demand story rather than recovery of the developed world). Further, all that fuel remains in the tank should we see a double dip in global demand with the EM governments having the ability to move very quickly – although investors seem now to be more wary of the next bubble as opposed to the double dip that was expected across 2009.

We continue to believe that the EMs will perform better (on fundamentals) than developed peers over the next 12 months and that exposure to EM consumer demand is the place to be in 2010 – demographically favouring those countries with strong government balance sheets (safety net).

Market rises were assisted by the US indicating interest rates would remain close to zero for an “extended period” and China indicating monetary policy would remain subdued.

It was a busy month in the infrastructure space with several large capital market transactions announced and the UK water regulator, Ofwat, bringing down its final determination.

Australia’s largest toll road operator, Transurban was approached by Canada Pension Plan and Ontario Pension Plan to acquire the business for AUD6.8b. At this stage Transurban is holding out for a higher price. The shares rose 20% on knowledge of the deal becoming public.

In the US, Berkshire Hathaway, controlled by Warren Buffett made its biggest takeover to date agreeing to acquire the 77% it does not already own in railroad company, Burlington Northern for circa USD26b; the stock jumped 27% on the announcement. The offer is subject to regulatory approvals which are expected to occur in 2010. Commenting on the deal, Warren Buffet said that it was an opportunity to ‘buy a business that is going to be around in 100 or 200 years, it is the most environmentally friendly way of moving goods’.

Ofwat delivered its final water regulatory determination in November. The outcome for most water companies was better then expected as the regulator agreed to allow more capital spending and higher prices over the next 5 years. Shares in these businesses rose following the release as investors welcomed both the improved outcomes and the removal of regulatory uncertainty. These companies should benefit in a rising inflation environment as nominal returns increase with inflation. We observe that global chatter about deflation has been changed to focus on possible inflationary pressures that may occur in the future.

Elsewhere in the world we continue to see investment in infrastructure plans by governments. Spain for example, despite being in one of the worst recessions in recent history, announced it is moving ahead with its massive transport infrastructure spend of USD249b over the next 10 years with the majority (44%) on rail infrastructure and the remainder pit between roads, airports and ports.

1. ITC Holdings (ITC): Market Capitalisation US$2.3b
2. Abertis Infraestructuras SA (ABE): Market Capitalisation US$15b
3. National Grid PLC (NG/ LN): Market Capitalisation US$26.4b.
4. TransCanada(TRP): Market Capitalisation US$21.2b
5. Vinci SA (DG): Market Capitalisation US$ 27b
6. Shenzen Intl Holdings (152 HK): Market Capitalisation US$1bn
7. SES : Market Capitalistion $8.6b
8. Northeast Utilities (NU): Market Capitalisation US$4.1bn
9. Red Eléctrica Corporacion S.A. (REE SM): Market Capitalisation US$7.4b
10. Spectra Energy (SE): Market Capitalisation US$12.3b

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Macro-economic news flow across the EMs continued to improve in October

• Reported CPI levels were contained/slightly up – signs of recovery but no overheating (yet)
• Industrial production numbers continue to improve
• Unemployment rates have slowed & in many cases reversed
• Benchmark interest rates were held flat with signs that tightening isn’t too far away
• GDP growth revisions continue to be on balance up

One of the themes we have been supporting this year is that the EMs have a lot of fuel left in the tank to support their domestic economies should it prove necessary (interest rate cuts, domestic surpluses etc). Further, and very importantly, while the EMs have been happy to utilise their resources they have proven to be wary of overheating their economies. And in October we saw the first signs that policy makers were looking to shift the balance away from support and towards tightening – something we have been looking for over the last few months

• In China the Central Bank indicated that loose monetary policy was not indefinite warning regulators to control the pace of lending thereby keeping a check on liquidity
• The HK Monetary Authority in a move to slowdown the rising property prices capped the mortgage limit to 60% and mortgage loan values
• Policy makers in South Korea & India indicated that tightening measures were not too far away
• In Brazil a 2% tax on foreign purchases of equities and bonds was imposed by the government, in an attempt to slow further appreciation of its currency

We do not expect a big run ahead of the year end for the EMs, but nor do we expect a significant pull back. Longer term we continue to believe the EMs offer good fundamental value with exposure to real growth.

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DISCLAIMER: This report is prepared exclusively for clients of Zenith Investment Partners (Zenith). The report contains recommendations and advice of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each client should assess either personally or with the assistance of a licensed financial adviser whether the Zenith recommendation or advice is appropriate to their situation before making an investment decision. The information contained in the report is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice. Zenith accepts no liability, whether direct or indirect arising from the use of information contained in this report. No part of this document is to be construed as a solicitation to buy or sell any investment. The performance of the investment in this report is not a representation as to future performance or likely return. The material contained in this report is subject to copyright and may not be reproduced without the consent of the copyright owner. Zenith usually receives a fee for assessing the fund manager and product(s) described in this document against accepted criteria considered comprehensive and objective.

Whilst still a relatively new manager, RARE has maintained a stable investment team since inception. The Manager has a demonstrated a continued commitment to team cohesion and development, evident in recent improvements in staff remuneration schemes and complementary additions to the team since the last review. These improvements have more closely aligned the interests of key staff with those of the Manager, increased the level of accountability for key staff and further reduced key person risk.”

This is an extract from the Lonsec report on the RARE Infrastructure Value Fund. Please click here to read the full report.

* The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned November 2009) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the fund manager for rating the product(s) using comprehensive and objective criteria.