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Fisher Funds loves Fibre

How a mega-trend and a moat leads to a valuable fixed income investment

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Matt Logan, Senior Investment Analyst — Fixed Interest

Matt Logan
Senior Investment Analyst — Fixed Interest | Email Matt »

22 August, 2019

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What makes a good fixed income investment? Well, it’s actually not too complicated. When we lend your money, we have two goals – its eventual safe return and earning an attractive return from it. The former though is by far the most important.

So what makes a good borrower? Sometimes we are lending for long periods and a lot can change over that time. So it’s important we are sure the company has a strong and enduring business model. This in turn gives us confidence they will be able to generate sufficient earnings to pay both the interest and principal back at maturity. In that sense, we are quite similar to our equity colleagues, just with a more defined time frame.

Take Chorus for example - New Zealand’s largest provider of fibre broadband infrastructure. Today their ultra-fast broadband (UFB) network passes over 1 million Kiwi homes. But this didn’t come quickly or cheaply. Seeking to build the next generation of broadband networks, Chorus has so far spent over $2 billion. This was vastly more than they could have funded from their own earnings. So in 2016 they sought the help of investors.

At the time, our analysis of the opportunity focused on two key questions. What was the long-term demand outlook for this product? And was fibre the right enabling technology? In broadband, things change quickly.  So with a scheduled repayment date in 2021 we needed to have a view on tech behind the business model. After all, five years ago Netflix wasn’t even available in New Zealand, yet today accounts for around 40% of internet traffic at peak times.

At Fisher Funds we often look to mega-trends to help evaluate the likely value of a borrower’s business model. In that context, you really don’t get any bigger than data consumption. From 4K streaming Netflix at home to mobile YouTube and social media, we are consuming ever increasing amounts of data. In fact, Auckland UFB users now consume over 70 x the data from pre-UFB days. We see no signs of this stopping. As new technologies are enabled, like 8K TV and virtual reality, we think this mega-trend is only just beginning to hit its stride.

The Chorus UFB network build-out strikes to the core of this mega-trend, and we think fibre is the winning technology. No other broadband product can offer the extreme speeds and reliability that fibre networks offer. Even the next generation of 5G networks will still only offer half the speed of currently available fibre, and are still a few years away for most.

We saw this opportunity back in 2016 and decided to partner with Chorus on that basis. Fast forward to today and Chorus is now the primary enabler for data consumption in our country. It is this business strength that gives us confidence that our investment is in good hands and that their commitment to pay us over 4% interest on your capital will be fulfilled.



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