As the investment company controlled by Bill Gates, you could be forgiven for thinking that Cascade Investment would have a heavy bias towards technology. As founder and currently the largest shareholder in Microsoft, the money Gates made from software propelled him to the position of world’s richest man in the 1990s before he gave away much of his wealth to good causes.
However, Cascade’s biggest holding isn’t one of the FAANG stocks responsible for much of the growth in the S&P 500 over the past few years, but the Canadian National Railway. Gates first bought into it in 2006 and now owns 13.5 per cent of the company, worth about $8.5bn.
Not to be outdone, Berkshire Hathaway chairman Warren Buffett, who has vied with Gates for the position of the world’s richest man for much of the past three decades, bought the Burlington Northern Santa Fe railway for $40bn in 2009.
While Gates and Buffett have known each other for many years, sharing the same ideas for their various philanthropic efforts and foundations, Alex Araujo (pictured) of the M&G Global Listed Infrastructure fund said the reason they both bought railways is not down to friendly rivalry.
The manager pointed out that railways offer an essential service for which demand remains remarkably steady, resulting in recession-resistant earnings – which is why infrastructure assets such as these account for roughly half of Cascade’s exposure and roughly a third of Berkshire Hathaway’s.
“The benefits of these assets will come 10, 20, 30 or 50 years in the future,” said Araujo.
“It’s not for them [Buffett and Gates], it’s for their legacy, it’s for their foundations, it’s to make the world a better place one day after they are gone. I think that’s a good example of the logic of investing in listed infrastructure.”
Araujo’s fund invests in the shares of infrastructure companies, which are backed by physical assets with long-life concessions that provide perpetual royalties. He said this results in a profile that is less volatile than a broader equity portfolio but that offers a better incremental return and a premium dividend yield.
While Gates and Buffett have both invested heavily in railways, for Araujo “the best infrastructure asset in the world” is the 407 ETR toll road in Toronto, near where he grew up.
Araujo described it as a great motorway that is “very fast, wide and efficient”, adding that it genuinely makes people’s lives better and for this reason they happily pay the tolls. However, he said this is not the reason why the asset is held in such high regard.
“Ferrovial, which owns the lane, was granted a 100-year concession in 1997, of which there are 82 years left,” he explained.
“I love these long-life assets. They create significant value over time from places you don’t really expect. Ferrovial has also been granted free-market pricing in its tolls so it has been able to charge whatever the laws of supply and demand allow. It has been able to grow its tolls by between 7 and 9 per cent more recently.”
While infrastructure is well known for providing these steady gains, a focus on innovation has allowed Ferrovial to add another lucrative revenue stream to its toll roads – thanks to an invention called managed lanes.
“A managed lane is part of a standard toll road network,” Araujo explained. “You’ll be driving in the toll road, you will have paid your $8 or $10 toll or whatever it is, but in the case of the LBJ Expressway in Dallas – Fort Worth – which is a very busy urban area growing very, very quickly – it gets congested, even though you are on a toll road.
“And it might be a Saturday morning and you might have two children in the back seat who are on their way to a birthday party, and you’re late. At this rate the bouncy castle will be gone by the time you get there. Something’s going to go wrong, maybe one of them is crying, maybe two of them are crying. And, of course, somehow it’s your fault. Maybe you’ve got a passenger on the other side who is also crying.
“And instinctively what you want to do is hit the eject button, which doesn’t exist yet – maybe in the future it will. But what you really want to do is throw money at the problem.”
Araujo said that managed lanes allow you to do this. When someone is driving on one of the motorways with this technology, GPS tracks their movements and flashes a price up on their phone showing their average speed and guaranteed arrival time if they choose to switch into one of the managed lanes.
“Problem solved, it will get you to the birthday party before the bouncy castle deflates,” the manager added.
“This is a great revenue generator for the company and it is rolling this technology out elsewhere, where it is allowed.
“Someone said to me this is an ‘only in America’ phenomenon, though – if you try to do this in the UK, you will probably go to jail.”
Data from FE Analytics shows the M&G Global Listed Infrastructure fund has lost 7.66 per cent since launch in October last year, compared with gains of 2.47 per cent from its MSCI World benchmark and 2.11 per cent from its IA Global sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
It has ongoing charges of 0.96 per cent and is yielding 2.85 per cent.