A YEAR IN GLOBAL LISTED INFRASTRUCTURE
Potential investors in listed infrastructure often have preconceived ideas about the asset class. Some are good – that it is a stable, low risk asset class – and some are not so good – that it is low growth and uniquely sensitive to interest rate rises. After a year at the helm of the M&G Global Listed Infrastructure Fund, Alex Araujo, Fund Manager gives his perspective on an often-misunderstood asset class.
IT IS A COMMON VIEW THAT INFRASTRUCTURE IS VERY SENSITIVE TO RISES IN INTEREST RATES, IS THAT TRUE?
The asset class pays a higher level of income than the broader market, meaning that it loses some of its relative attractiveness when interest rates rise. This can see infrastructure assets subject to knee-jerk sell-offs when central banks change policy.
However, such sell-offs are not necessarily justified. In most cases, the cash flow from infrastructure assets is linked to economic growth and inflation. Interest rates tend to rise in line with growth and inflation, meaning that the net effect on cash flows is negligible. Also, crucially, we invest in growing businesses that pay a growing dividend, which are incomparable to bonds and therefore should not be traded according to the attractiveness of their dividend yield relative to bond yields.
As such, the sell-offs linked to interest rates can create valuation opportunities in the sector. Markets can be very short-termist and this has thrown up opportunities over the past year. These are high quality businesses generating strong cash flows at a time when the market isn’t interested in owning them, so we’ve been adding to many of our holdings which have been caught up in the indiscriminate selling.
HOW HAS THE FUND PERFORMED OVER ITS FIRST YEAR?
First and foremost, we are pleased to have delivered a positive absolute return over our first twelve months, in a challenging environment for the asset class. We took advantage of the interest-rate-related weakness we saw in infrastructure stocks in January and February to add to some holdings, which has been a key driver of returns since then. Throughout the year, our diversified approach to infrastructure investing – looking beyond the traditional realm of utilities, energy and transport infrastructure and investing in social and evolving infrastructure businesses – has supported returns, with nearly every sector contributing.
We have accomplished this with a beta of roughly 0.7 and less volatility than the global equity market. Importantly, we’ve protected on the downside when the broader market has fallen, such as from late January through March, without missing out on the upside when they have rebounded.
Finally, dividend growth has been strong across the portfolio, and for us that’s the ultimate measure of the health of the companies we’re investing in. We have seen double-digit dividend growth from holdings across the three classes of infrastructure that we invest in.
WHERE ARE YOU FINDING GROWTH AT THE MOMENT?
High growth companies have exerted a powerful lure for investors in the recent phase and this has been a headwind for infrastructure stocks. However, there is plenty of healthy growth to be found in the infrastructure asset class. We invest across three broad categories and we find growth in all of them. In traditional infrastructure businesses such as utilities, we look for growth in areas such as renewable energy, or the growing electricity grid requirements to enable the broader deployment of electric vehicles. In social infrastructure, we look for demographic trends that drive growth. In the evolving segment, we participate in structural trends, such as society’s digitalisation, through our investments in communications and transactional infrastructure.
“The risk characteristics we’ve seen the fund exhibit in its first year demonstrate the defensive qualities listed infrastructure can bring to a portfolio at a time when markets are becoming increasingly unpredictable.”
WHAT DOES THE GEOGRAPHIC WEIGHTING OF THE FUND LOOK LIKE TODAY?
The fund has its highest weighting in North America, reflecting a preference for the regulatory regimes in this region, among other things. However, we are fully diversified and have a large part of the portfolio outside of North America, too.
Geographic weightings are partly influenced by the fact that there are certain types of infrastructure businesses domiciled in specific regions. Listed energy infrastructure is mainly a North American phenomenon, for example, while airports tend to be listed in Europe and Asia.
We do also have investments in emerging markets, where it is possible to invest to capture structural opportunities from more robust economic growth, as well as demographic and urbanisation trends. We invest in transportation infrastructure in Latin America and China, for example, and have fibreoptic exposure in Asia. Importantly, emerging markets require additional due diligence. We tend to only invest in businesses listed on mainstream exchanges overseen by reliable regulators. We also require companies to demonstrate high-quality in-house governance.
IS LISTED INFRASTRUCTURE STILL A DEFENSIVE ASSET CLASS FOR MORE DIFFICULT TIMES?
Definitely. The risk characteristics we’ve seen the fund exhibit in its first year demonstrate the defensive qualities listed infrastructure can bring to a portfolio at a time when markets are becoming increasingly unpredictable.
However, selectivity within the asset class could not be more important, and there are numerous critical factors investors must bear in mind. Regulation will shift, for example, with different political regimes. Infrastructure is a part of the economy where political pressure tends to have a particularly strong influence. Significant changes in the regulatory and political environment can impact a company’s ability to generate dividend growth.
It is also important to stay diversified, across regions and sectors. Different markets are at different stages in the economic and monetary policy cycle, as well as different stages of economic growth and as such may have differing infrastructure needs. Holding a blend can create more consistency for investors.
HOW ARE YOU POSITIONING THE FUND TODAY?
Flexibility has been required recently as markets have become increasingly volatile and unpredictable. We have been investing actively in the belief that the market has been indiscriminate in selling down companies in some cases. We have seen this in economic infrastructure this year – particularly the utilities sector – and as such we have been adding here. We have also seen it in certain regions, such as Italy, where the recent election caused company valuations to change materially and thereby created opportunities. We operate a low turnover strategy, but we believe it is important to take advantage of such episodes, where possible.
Alex Araujo - M&G Global Listed Infrastructure Fund