Transurban, Sydney Airport could be flying on 'extreme' event

"I don't know when it's going to change, all I know is it probably will change. Therefore, I just want to be very, very cautious about those sort of assets that the discount rate heavily influences and make sure that I really want to own them. Now I could be wrong on interest rates; they could stay here for the next 20 years in which case they all continue to be good investments."

Mr. Moore said that if someone 20 years ago had foreshadowed Italian government bonds trading at negative yields, they would have "locked you up in the asylum."

"The authorities did everything they could to break the back of inflation, and they succeeded, now everyone wants to break the back of disinflation, and my suspicion is that some time down the track they're going to succeed, and that's going to have a negative impact on those sort of assets."

All investors were battling with the concept of what a company is worth at zero percent interest rates, Mr. Moore argued.

"There's a big danger at the moment; people have become so used to declining bond yields and low bond yields they're making some major investment mistakes." The same could be said of property and healthcare, he said.

Steve Johnson, of Forager Funds, recalled his first job at Macquarie, where he specialised in infrastructure. "We had a very savvy investor co-investing with us, the Ontario Teachers Pension Plan, and I was building the model, and we had a discount rate of 10 percent and a growth rate of 8 percent for a very long time. That spits you out a very, very high multiple in terms of what you can pay for that airport, 50 times."

"The guy says to me, 'well change that rate from 8 to 6 and see what happens.' And all of a sudden your valuation halves for an asset like that and whilst that's a high-growth-rate-close-to-discount-rate problem, we're getting the same issue now just because of very, very low discount rates. You start substituting a 4 for a 3 and having a very big impact on valuation that's been a big tailwind for the last few years, but if you get a massive headwind, and it turns and goes the other way, it can mean dramatic changes in asset prices."

Even bullish fund managers do not disagree with Mr. Moore and Mr. Johnson's predictions that infrastructure stocks will underperform in periods of rising interest rates.

The problem is the consensus is still pointing to lower interest rates.

At the same forum, fund managers were drawn on their stock tips. Eley Griffiths Group's Ben Griffiths nominated Aventus Retail Property Fund, and Wilson Asset Management's Geoff Wilson volunteered APN News & Media.

Roger Montgomery, from Montgomery Investment Management, recalled 1981.

"You had half the debt corporate United States has today; you had stocks trading on [price earnings multiples] of seven and you had this long-run credit-fuelled growth ahead as well as productivity improvements. That was a really good time to invest. Now you've got the opposite and stocks are trading at 18 times. How can that also be an attractive time to invest?

"When interest rates are at zero, people talk about something being worth 100 times [earnings], that's just what other people are willing to pay. We're not willing to pay that ... I don't believe historically there's ever been a time when paying 100 times for something has actually worked out."

By Vesna Poljak

Read more at afr.com


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