Global Infrastructure funds invest in public assets and services that help people to develop their daily lives. Those could be energy, transport or telecommunications, all of them services with an inelastic demand. Enormous infrastructure plans and the global energy transition provide a supportive environment for infrastructure-related themes like halting climate change, decarbonisation, electrification, e-mobility, and new radio (5G). Infrastructure sits at the heart of the transition to a net-zero carbon world; it is central to the solution for our collective challenge of climate change.
We wanted to analyse the investment opportunities available in the Global Infrastructure sector, and talk about the strategies of their funds with Credit Suisse, M&G and Wellington.
CS Invm Fds 2 – Credit Suisse (Lux) Infrastructure Equity Fund
Werner Richli, Portfolio Manager for the CS (Lux) Infrastructure Equity Fund
The CS (Lux) Infrastructure Equity Fund invests along the value chain of the global infrastructure opportunity set. The investment universe encompasses companies that provide the facilities and services necessary to maintain and develop modern infrastructure. The objective is to maximize total return from capital appreciation and dividends over extended periods.
It follows an unconstrained, non-benchmark-oriented approach to identify attractively valued companies positioned to benefit from the infrastructure theme. The Fund focuses predominantly on companies with predictable, stable cash flow generation and long-term growth operating in regulated or concession-based businesses or in those with relatively high barriers to entry. These companies belong to one of the following four themes: utilities, transport infrastructure, oil & gas storage & transportation infrastructure, or telecommunications infrastructure. As of February 28, 2022, the Fund was mainly invested in the US, Canada, Spain and France, with Cheniere Energy, Vinci, RWE and Canadian Pacific Railway covering the top positions.
The broad aim of the Fund is to identify the top 40 to 60 investments out of a potential universe of almost 500 stocks, and then to combine them in the optimal way. The investment process reflects the consistent and disciplined application of ranking the universe according to the expected macro-economic outlook, the perspectives of each individual subtheme and a bottom-up stock selection process, based on fundamental analysis. ESG-related risks and opportunities are an integral part of the investment process because they can affect growth, profitability, and the cost of capital in the long term.
Referring to energy infrastructure, as the energy transition proceeds, gas transport and storage infrastructure can be readied for hydrogen blending and for pure hydrogen transport, even at lower cost than constructing new purpose-built hydrogen networks. Through careful portfolio construction, we position the Fund by appropriately incorporating qualitative, ESG-related and valuation scores. In the past 3 years, the Fund has shown a strong performance, outperforming its reference index MSCI World.
Enormous infrastructure plans and the global energy transition campaigns provided a supportive environment for infrastructure-related themes like halting climate change, decarbonisation, electrification, e-mobility, and new radio (5G). Thanks to our assessment of the macroeconomic environment and our active approach, our investors benefitted from the fluctuations in oil and gas prices, the strong focus on renewable energies, the unbroken demand for digital infrastructure, and the reopening of the economies after the pandemic. Just as Covid-19 increased data volume massively, triggered by a demand for virtual conferences due to the work-from-home environment, recent geopolitical events, in our view, are likely to trigger an acceleration of the renewables build-up and energy efficiency measures.
M&G (Lux) Global Listed Infrastructure Fund
Alex Araujo, Portfolio Manager M&G (Lux) Global Listed Infrastructure Fund
The M&G (Lux) Global Listed Infrastructure Fund invests in owners and operators of physical infrastructure assets around the world and seek to access the reliable and growing cashflows generated from these critical assets over the long term. The fund pursues a modern approach to listed infrastructure by investing beyond the traditional scope of utilities, energy infrastructure and transport, to capture the long-term growth opportunities in social and digital infrastructure driven by multi-decade themes.
The analysis of ESG factors is an integral part of the investment process to ensure that the assets we are investing in are sustainable and therefore commercially viable over the long term. Unless the assets are sustainable, businesses cannot generate sustainable and growing cashflows which ultimately fuel the rising dividends we seek.
Infrastructure sits at the heart of the transition to a net-zero carbon world; it is central to the solution for our collective challenge of climate change. Given the impetus behind renewable energy deployments, we believe that utilities actively participating in the energy transition towards more sustainable forms of power generation are well placed to benefit from this structural growth trend.
We also see excellent prospects for digital infrastructure globally. Governments acknowledge the critical nature of infrastructure in the digital economy – as a result of which universal broadband access, including the rollout of 5G networks – has been an integral part of fiscal stimulus packages around the world. But there are other themes at play with greater longevity. Data centres are beneficiaries of a powerful structural growth trend, namely the proliferation of data in our increasingly digital world. Similarly, communication towers companies are capitalising on the long-term opportunity created by rising internet penetration and mobile data usage. Investors would do well to look beyond immediate events and focus on the long-term outlook to reap the benefits of infrastructure to the full.
Other dominant themes include transportation of the future, urbanisation, water and waste management and social and demographic shifts. These thematic tailwinds are likely to persist for many decades to come, creating exciting opportunities for investors.
Listed infrastructure offers value which private buyers have started to act upon. We have seen three instances last year – Naturgy Energy, CCR and Sydney Airport – where private capital has offered to buy or taken a stake in one of our holdings. We believe that these developments provide a clear indication that the reliable and growing cashflows from infrastructure assets are going cheap in the stock market. Investors with a long-term time horizon, such as those in the private sphere, are starting to take notice and act on their convictions.
Finally, inflation-linked revenue is a key feature of infrastructure which helps the asset class to provide a degree of inflation protection. We welcome a world of economic growth with controlled inflation which provides many listed infrastructure companies, whether directly or indirectly, with a vital source of growth.
Wellington Enduring Assets Fund
Tom Levering, Portfolio Manager – Wellington Enduring Assets Fund
Enduring Assets is a benchmark agnostic, long-only, concentrated, global listed infrastructure approach which seek to invest in companies with long-lived physical assets the Portfolio Manager believes possess advantaged competitive positions and stable earnings (e.g., utilities, midstream energy, transportation & data infrastructure, etc.).
When compared to other liquid infrastructure peers, our footprint will likely be more defensively oriented with better downside protection characteristics, as a result of our preference towards regulated assets and away from companies with higher commodity price sensitivity or economic cyclicality.
We are also willing to invest in emerging market companies where stakeholder incentives align, as we have found this exposure attractively valued and risk-reducing at a fund level.
Our primary valuation metric, which we call “Intrinsic Return”, attempts to quantify the forward-looking annual return potential of each holding by adding annual cash flow plus annual value creation plus any inflationary/pricing tailwinds. While we prefer stocks with quantitatively high Intrinsic Returns, we consider this return potential in the context of other important factors such as cash flow stability, cash flow duration, balance sheet strength, management quality, home country cost of capital, local inflation rates, and overall impact on portfolio risk. Today we find this measure at the high end of its history. Importantly and not surprisingly, we find that strong forward-looking ESG metrics correlate well with these important factors.
Secular growth opportunities
We are most focused on those areas where we perceive high and long-lived growth. While the portfolio is constructed stock by stock, there are two secular themes that come to life. Global governmental support, most notably in the US, EU, and China for the decarbonization of energy supply in our opinion should provide high growth and long-lived opportunities in power networks, clean power generation, and low-carbon energy. In addition, the data infrastructure sector (cell towers, broadband networks, and mobile telecommunications) possesses high and long-term growth potential, driven by increasing data demand and governmental support (e.g., US infrastructure Plan).
Given the desire of Europe to reduce dependence on Russian energy supply, we expect the decarbonization of energy supply to accelerate further over the next decade. Stocks in these areas represent a significant portion of the fund. This will result in a massive tailwind for the European utility sector: they will need to triple wind & solar capacity and significantly increase investments in their electric networks, to modernize the grid to handle more renewables and improve international interconnections. In addition, they will have to invest more in gas infrastructure including LNG terminals and to prepare for green hydrogen. Whereas Covid accelerated digitization across the world, we believe the Russian invasion of Ukraine will accelerate Europe’s energy transition.