The RARE 200 is a proprietary investment universe used to select securities for the RARE Infrastructure Value Strategy. The companies chosen for the universe must have high levels of liquidity, quality, and what RARE believes constitutes core infrastructure.
Companies in the RARE200 must have the following characteristics:
Long-duration assets - The company owns assets whose lives are typically measured in decades.
Predictable cash flows - Regulatory frameworks or the structure of long-term concession contracts means the company has predictable cash flows.
Low volatility - Where a company has predictable and stable revenues, cost structure and capital expenditures its value is less likely to be volatile.
Inflation protection - Many infrastructure companies benefit from having revenues or assets (sometimes both) that are indexed to inflation.
Monopoly or limited competition - The size and expense of infrastructure assets mean they often operate as geographic monopolies or oligopolies governed by regulatory frameworks or long-term concession contracts.
Another step in creating the RARE 200 is to assign each potential company a RARE Infrastructure Score. Using a scale of 0-10, this score represents the extent to which the assets of a company meets RARE’s definition of infrastructure.
This score is a geometric average of two measures:
The exposure score reflects the concentration of infrastructure in each company. This is the proportion of value (or a proxy for it) that is accounted for by assets which exhibit infrastructure characteristics.
The quality score reflects the expected predictability of a company’s future cash flows. This assesses sovereign risks, the regulatory environment, pricing transparency and volume predictability for a company’s underlying assets.
One example of how this system works is that if a company scores relatively low for the proportion of infrastructure assets as part of its total value, then its infrastructure assets need to be of a higher quality to be eligible for inclusion in the investment universe.
A primary measure of liquidity is the Average Daily Volume (ADV) of shares traded on stock exchanges. However, the transaction costs associated with a trade are also impacted by whether the stock trades in larger blocks or many smaller parcels, the bid-ask spread, the volatility of the stock’s home market and the volatility of the stock relative to its market. To factor in these measures RARE has developed an Adjusted ADV in consultation with its traders to score each company on one of three levels of liquidity, as follows:
High – Adjusted ADV > $10 million. Here a position can be entered or exited with low transaction costs.
Medium – Adjusted ADV of $2 million - $10 million. A position’s entry or exit will take a few days with a medium level of transaction costs.
Low – Adjusted ADV of less than $2 million or a market capitalisation of less than $500 million. Here liquidity is too low for the company to be considered by RARE.
For a company to enter the RARE 200 it must meet one of two requirements. It must have a minimum infrastructure score of 8.0 and medium or high liquidity. Or, it must have an infrastructure score of approximately 7.0 or greater, and it must have high liquidity.
On a quarterly basis, the composition of the RARE 200 is reviewed by an investment leadership team made up of the Co-CIOs and Co-CEOs of RARE Infrastructure Nick Langley and Richard Elmslie, as well as Shane Hurst and Charles Hamieh who are both Portfolio Managers and Senior Investment Analysts. The members of this team have an average tenure with RARE of nine years.