The Infrastructure Supporting “Nearshoring”

October 19, 2021

Geopolitical risk and manufacturing bottlenecks are causing corporations to rethink their supply chains, making them shorter and closer to home. As this trend begins to unfold, the infrastructure underpinning “nearshoring”1 has become a theme in Reaves’ essential service infrastructure portfolio.

The following reviews the trend, and how the infrastructure companies tied to it embody the characteristics Reaves seeks.

COVID Creating a Supply Chain Rethink

Since the 1980s, most manufacturers have operated utilizing just-in-time principles - where physical inventories are minimized and materials arrive when needed or “just in time.” This has enabled manufacturers to improve capital efficiency by tying up less working capital as well as floor space.

The technique has relied on careful synchronization of the movement of unfinished goods within a supply chain. As these supply chains have become more sophisticated, they also have become longer and more complex.

While companies always seek efficiencies in their manufacturing, COVID proved disruptive for long supply chains, causing many companies to look at both shortening the supply chain and bringing it closer to home. Geopolitical tensions with China have also caused many U.S. companies to move manufacturing to the U.S., Canada, or Mexico.

These changes have large implications for select infrastructure businesses. It creates demand for more warehousing space to store inventories. It also creates a need to make those warehouses more efficient. Finally, as more firms move manufacturing to the U.S., Canada, and Mexico, it creates more transport demand within North America.

New Niche, Same Investment Playbook

Each of those themes are represented in Reaves’ Long Term Value Strategy2 through its holdings in warehouse companies, logistics firms, and railroad operators. While such stocks represent a new niche in our portfolios, they draw upon the same investment playbook that has served Reaves for years. We search for companies providing essential infrastructure that the economy depends on, and often have sustainable, competitive moats around their businesses that would be difficult to disrupt or replicate.

We believe that companies with these characteristics have the ability to generate consistent, sustainable cash flow and revenue. The resiliency of their business models should also help the stocks compound value over all market cycles

Below is a description of the competitive moats for each of the industries tied to the nearshoring trend:

  • For warehousing facilities, the competitive moat is location. There are limited, large spaces in urban areas and near major highways or railways that can house large storage areas and facilitate large trucks moving in and out of a facility. As cities continue to grow, that space commands more of a premium.
  • For logistics companies, the competitive advantage is in the technology. There are a limited number of companies that can efficiently design, run a warehouse, and bring to bear the specific robots and automation tools a company needs to make their warehouse more efficient.
  • Finally, the railroad networks are truly unique infrastructure assets; new rail systems are near impossible to build on account of modern population density and ensuing construction limitations. Most of the current North American network was built in the latter half of the 19th century. The result is a modern oligopoly of only seven North American operators.

As the trend of nearshoring pushes forward, we think each of these business models will continue to benefit, and that the competitive advantages inherent in these companies make them prototypical Reaves essential service infrastructure stocks.

 

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Disclosures and Definitions:
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, employee-owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

1 Nearshoring is where a business moves its operations to a nearby country from one of greater distance. Nearshoring is a term that came out of the practice of offshoring, which is when companies move their product manufactured to a lower landed cost region than their native country.

2 Beginning December 2019, Reaves LTV Strategy is represented by the LTV SMA Wrap Composite. This composite contains those LTV discretionary portfolios with wrap (bundled) fees. Wrap accounts are charged a bundled fee which includes the wrap sponsor fee, as well as, Reaves’ investment advisory fee. Due to compliance requirements, the net-of-fees calculation is computed based on the highest annual fee assigned by any wrap sponsor who utilizes this portfolio in an investment wrap program (300 basis points from 1/1/03 through 12/31/16 and, effective 1/1/2017, 250 basis points). The LTV SMA Wrap Composite performance consists of money-weighted, time-weighted returns and it includes the reinvestment of all dividends and other earnings. The inception date of the composite is December 2002; however, the composite was created in January 2013. This composite has been managed in a similar manner to the LTV ERISA Composite which ended in December of 2019. The LTV SMA Wrap Composite does not represent all of Reaves’ assets under management.

Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.

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