It was certainly a rough start for the Socceroos, as the Australian mens national soccer team is affectionately known, in the 2014 FIFA World Cup, as the side fell behind 2-0 to Chile, playing on its home continent in nearby Brazil, in the first 15 minutes of the first game of Group B competition.

Soccer–football to the rest of the world–hasn’t gained much purchase in the US. But it is a game that perhaps more than any other reflects realities of life: You can do just about everything right for 90 minutes yet still not find the back of the net and lose on a fluke play such as an “own goal” or a poor spot-kick award by a less-than-competent official.

Or, maybe even worse, you can expend all your energy and get no result, neither win nor loss but an inconclusive draw.

But this contemplates only a single game. In a tournament such as the World Cup you must successfully contest seven games to lift the trophy, three in the group stage, another three in the “knockout” rounds, and then the final.

Over time, quality, commitment and endurance win out. It’s gray, nuanced and beautiful.

A single day–or a week, even a month–in the market can leave you questioning your portfolio, its allocations and the sanctity of the game itself. There are innumerable inputs that determine short-term market movements, most of them of the human variety and so therefore well beyond the total comprehension of any single individual.

You’re diversified by geography, sector and company, you’ve built positions with attention to value-based buy-under targets, you’re holding high-quality companies that generate consistent cash flow and maintain solid balance sheets, buying on weakness, selling into strength to bring balance back to your portfolio.

And yet there are “Flash Crashes and equally irrational, equally frustrating events such as last year’s rising-rate-fear selloff that laid low dividend-paying stocks around the globe.

But one is the confluence of technology, high-frequency trading and “fat fingers,” the other a perfectly normal but no less rash and oversimplified human reaction to isolated factors in a hugely complex system.

Over time, quality, commitment and endurance win out. It’s gray, nuanced and beautiful.

(And, for good measure, Socceroo hero Tim Cahill struck in the 35th minute to get his side back into the game, which stood at 2-1 as of this writing, near the end of the first 45 minutes.)

From Philosophical to Practical

Infrastructure is a big deal in Australia right now.

Infrastructure Australia, which advises the federal government, said at least AUD300 billion needs to be spent on new infrastructure if the country is to escape a crippling impact on productivity.

Australian states, including Queensland and New South Wales, plan to sell existing infrastructure, including energy distributors and power grid assets, to pay for new projects such as roads, bridges and hospitals.

And Australian fund managers and business leaders have held meetings with US and Canadian investors this month, coinciding with visits to both countries by Prime Minister Tony Abbott, to drum up investment in infrastructure Down Under.

According to Dealogic, more than AUD12.4 billion in infrastructure deals have already been completed this year in Australia, up from AUD8.4 billion in the first half of 2013 and AUD5.9 billion in same period in 2012.

These include the sale in April of a 99-year lease on Newcastle Port in New South Wales, the world’s biggest coal-export terminal, for AUD1.75 billion to Chinese and local buyers. Queensland Motorways, which also attracted strong international bidding, fetched AUD7.1 billion from AE Portfolio Conservative Holding Transurban Group (ASX: TCL, OTC: TRAUF).

Strong demand from pension funds, sovereign wealth funds and strategic buyers has made Australian asset sales relatively easy. Among pension funds, most of the interest has come from Australia and Canada, where money managers tend to allocate more to infrastructure assets than their US counterparts.

But US institutional investors, although late to the game, are now coming in significant numbers, looking to counter stubbornly low yields on traditional investments such as bonds.

Infrastructure has been a big part of the AE Portfolio from the beginning, and we’ve increased our exposure over time.

The Portfolio on AE’s September 2011 inception date included AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY), APA Group (ASX: APA, OTC: APAJF) and Envestra Ltd (ASX: ENV, OTC: EVSRF).

We added Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) in November 2011, Transurban in February 2012, Australand Property Group (ASX: ALZ, OTC: AUAOF) in March 2012, Ramsay Health Care Ltd (ASX: RHC, OTC: RMSYF) in September 2012, Spark Infrastructure Group (ASX: SKI, OTC: SFDPF) in February 2013, GPT Group (ASX: GPT, OTC: GPTGF) in March 2013, Sydney Airport (ASX: SYD, OTC: SYDDF) in December 2013 and DUET Group (ASX: DUE, OTC: DUETF) in January 2014.

So far the prospect of higher bond yields, a strengthening Australian dollar and the possibility a surprisingly upbeat Reserve Bank of Australia will raise rates in 2015 haven’t sullied utilities, A-REITs and other infrastructure assets in the eyes of investors.

We suggest their yield-plus-growth character, with investors in search of stability, will remain very relevant for some time yet given that economic growth is sluggish at best.

Portfolio Update

We’re about two weeks short of the end of the first half of 2014.

June 30 also marks the end of fiscal 2014 for most companies listed on the Australian Securities Exchange (ASX), which means we’ll soon be in the thick of another reporting season. We have details on announcement dates at the end of this month’s Portfolio Update.

For now we’ll take a look at how the AE Portfolio’s 15 Conservative Holdings and 13 Aggressive Holdings have performed on a total return basis so far this year.

Including dividends paid as well as capital gain or loss, the current Conservative Holdings have generated an average total return in US dollar terms of 14.3 percent from Dec. 31, 2013, through June 12, 2014. The Aggressive Holdings are up an average of 6.8 percent.

All 28 Holdings have combined to post a US dollar average total return of 10.8 percent.

For reference sake, the S&P/Australian Securities Exchange 200 Index is up 9.2 percent thus far in 2014 in US dollar terms. The S&P 500 Index is up 5.4 percent, as is the MSCI World Index.

US investors who are long Australian stocks have benefitted from a 5.7 percent appreciation of the Australian dollar versus the US dollar.

The strong performance of the Conservative Holdings largely reflects a broader trend: Investors are hungry for Australian infrastructure assets.

Portfolio Update has the latest developments for our Conservative and Aggressive Holdings, including updates on a couple takeovers in progress.

In Focus

Easy-to-understand businesses, low earnings risk, an average yield greater than 5 percent: The case for the seven companies in the Utilities group of the AE How They Rate coverage universe is pretty straightforward from an individual investor’s perspective.

The attractiveness of these assets has been made even clearer in recent weeks with the announcement of several buyout offers and the emergence of a high-profile bidding war.

Of course the hunt for Australian infrastructure asset is not limited to the energy sector, as real estate investment trusts have also been in something of a buyout-frenzy, involving purely domestic competition as well as entreaties from abroad.

That’s to say nothing of a coming wave of asset sales by Australia’s state governments that could involve several of the companies discussed below as well as pension fund and other major asset managers around the world.

What will attract institutional investors are the simplicity, the cash flow, the yield and the stability such assets provide.

In Focus takes a look at the seven companies included in the Utilities group of the How They Rate coverage universe.

Sector Spotlight

AE Portfolio Conservative Holding Aberdeen Asia-Pacific Income Fund (NYSE: FAX) is one of only five out of a universe of 106 US closed-end funds with a “Gold” rating from investment research firm Morningstar.

The fund was so cited because it’s the only one of its kind that enables US-based investors to access developing Asia’s debt markets as well as Australia’s. In fact very few funds of any kind provide individuals the opportunity to invest in bonds issued in the difficult-to-reach Asia-Pacific region.

Developed and emerging economies in the Asia-Pacific region continue to account for increasing shares of global economic growth and will account for an estimated 49 percent of world gross domestic product (GDP) by 2050, up from 29 percent in 2011.

Aberdeen Asia-Pacific Income Fund is a compelling option for income-focused investors who also seek some protection from the impact of a deteriorating US dollar. At the same time you’ll get paid USD0.035 per share per month, an annualized dividend rate of USD0.42 per share. That works out to a yield of 6.7 percent based on the fund’s June 11, 2014, closing price.

We have more on Aberdeen Asia-Pacific Income Fund in this month’s first Sector Spotlight.

Iron ore recently broke through the psychologically significant USD100 per metric ton threshold for the first time since September 2012 and has continued sliding, along with analysts’ forecasts for its eventual bottom.

So far this year the price of iron ore is down more than 30 percent, taking it well into bear market territory. The benchmark iron ore price, measured out of the Tiajin port in China, slumped 2.1 percent overnight to USD91.50 on June 11, 2014, a 21-month low.

Supply from low-cost miners, including AE Portfolio Aggressive Holding Rio Tinto Ltd (ASX: RIO, NYSE: RIO), is still rising quickly.

Rio Tinto sits at the lowest end of the global iron ore production cost curve and is well-positioned to remain profitable with prices as low as USD50 to USD60 per metric ton.

It’s trading at a sharp discount at these levels and represents solid  value, realistic prospects for long-term growth and the promise of a more aggressive capital program, including dividends and share buybacks, as it exits a period of high capital expenditure and trims its operational focus following years of aggressive expansion during the early 21st century global resource boom.

This month’s second Sector Spotlight focuses on Rio Tinto.

News & Notes

Mixed Signals but Sustained Growth: In the short term Australia’s economic data might be sending mixed signals. But the country’s economy boasts an incredible long-term record of 22 consecutive years of growth, notes AE Associate Editor Ari Charney.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that have recently announced profit warnings as well as those that announced reduced dividends during fiscal 2014 first-half earnings reporting season Down Under.

The ADR List: Many Australia-based companies that list on the home Australian Securities Exchange (ASX) are also listed on the New York Stock Exchange (NYSE) or over-the-counter markets as “sponsored” or “unsponsored” American Depositary Receipts (ADR).

Here’s a list of those companies, along with an explanation of what these ADRs represent.

How They Rate

How They Rate includes 112 individual companies and four funds organized according to the following sectors/industries:

• Basic Materials
• Consumer Goods
• Consumer Services
• Financials, including A-REITs
• Health Care
• Industrials
• Oil & Gas
• Technology
• Telecommunications
• Utilities
• Funds

We provide updated commentary with every issue, financial data upon release by the company, and dividend dates of interest on a regular basis.

The AE Safety Rating is based on financial criteria that impact the ability to sustain and grow dividends, including the amount of cash payable to shareholders relative to funds set aside to grow the business.

We also consider the impact of companies’ debt burdens on their ability to fund dividends. And certain sectors and/or industries are more suited to paying dividends over the long term than others; we acknowledge this in the AE Safety Rating System as well.

We update buy-under targets as warranted by operational developments and dividend growth.

In Closing

I’m notified almost instantly via e-mail when (or if) you post a comment after you read an article. I can provide nearly real-time answers to your questions, provided the subject matter can be disposed of in such manner.

Thank you for subscribing to Australian Edge. We look forward to hearing feedback about how we can improve the service.

David Dittman
Editor, Australian Edge

Follow @ddittman