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Direct from the fund manager - macro views on listed infrastructure

06/02/2020

Alex Araujo, fund manager of the M&G Global Listed Infrastructure Fund gives his latest views on listed infrastructure and the positioning of his fund.

How does China’s Belt and Road Initiative impact the infrastructure sector? Does it play any role in your investment decisions?

Our strategy focuses on companies with existing physical infrastructure assets generating stable and growing cashflows over the long term. Physical assets provide a barrier to entry, in contrast to builders of infrastructure which are driven by different dynamics. For this reason, our success is not reliant on governments delivering on their infrastructure programs, whether they be in China or the US. Cement companies and construction businesses are not part of our investible universe.

Many emerging markets are beneficiaries of rising investment in infrastructure to support their growing economies, but as an equity investor, it is important that potential candidates for the portfolio adhere to high standards of corporate governance. Governance is a key aspect of our engagement with senior management to ensure that the businesses we invest in are managed in the interests of all stakeholders, including those of shareholders.

Investment decisions for the fund are driven by bottom-up stock selection based on the fundamental analysis of individual companies. The strategy has a clear focus on owners and operators of physical infrastructure assets which provide essential services for the smooth functioning of a modern society – critical assets that form the backbone of the global economy.

Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries.

You invest in three segments (economic, social, evolving). Do you prefer any of the segments at the moment? Where do you see the best opportunities within each segment?

Economic infrastructure accounts for the largest part of the portfolio and encompasses utilities, energy and transportation infrastructure – the traditional cornerstones of infrastructure investing. Utilities are typically perceived as bond proxies which offer little more than stability, but we have a clear preference for growth businesses such as Ørsted which is a beneficiary of long-term trends. The Danish company is the world leader in offshore wind, the fastest-growing segment of renewable energy. Renewables are increasing their share of global power generation as the world steps up its efforts to tackle climate change. This is a powerful theme which is likely to endure for many decades to come.

Companies in energy and transportation infrastructure are also exposed to long-term growth trends. In energy, Enbridge owns and operates pipelines and storage terminals which are pivotal to the distribution of hydrocarbons from North America’s most prolific basins. In transport, the airports owned by the likes of Ferrovial (London Heathrow) and Vinci (Lisbon) are beneficiaries of the structural growth from rising Asian and emerging market passenger volumes. Economic infrastructure is more than just a safe haven.

Infrastructure is also not restricted to utilities, energy and transport. A listed infrastructure portfolio can do so much more if we broaden our scope to capture the full diversity of the asset class. We have therefore updated the investible universe for the modern age and extended our opportunity set beyond the traditional definition. In addition to economic infrastructure, we invest in two other distinct categories, which we label as ‘social’ and ‘evolving’ infrastructure.

Social infrastructure, which includes health and education under its remit, offers similar characteristics to the economic sphere, albeit from a different asset base which provides diversification benefits for the portfolio. As with economic infrastructure, the attraction of this segment is not confined to defensiveness. Unite Group, for example, is exposed to much faster growth. The leading provider of student accommodation in the UK is well positioned in a market with favourable dynamics, manifested by record student numbers from overseas and a shortage of quality housing.

Evolving infrastructure, on the other hand, gives us exposure to the structural growth driven by our increasingly digital society. The strong growth characteristics of this infrastructure class at the forefront of innovation injects a new dimension to an asset class with stability at its core. Internet penetration and mobile data usage is growing exponentially around the world, and consumers and businesses alike are dependent on these infrastructure networks to feed the insatiable appetite for more information. Data centres, broadband networks and communication towers are capitalising on this proliferation of data and provide some of the most exciting growth opportunities in the portfolio.

How important is the dividend policy of a company for your investment decision?

We aim to provide a rising income stream for our investors, and in order to meet this objective, we insist that every company in the portfolio not only pays a dividend but is also committed to growing the dividend stream over the long term. The infrastructure companies in which we invest have the potential to generate stable and growing cashflows (often inflation-protected), which in turn could allow them to sustain increasing dividend payments.

Dividend growth is central to our investment philosophy. Investing in companies with consistently rising dividends is a winning strategy over the long run and its success is backed by empirical evidence. Shareholders are not the only beneficiaries of rising dividends; companies benefit too. We believe that a progressive dividend policy helps companies to improve because it instils capital discipline. A rising dividend stream regulates the amount of cash that can be reinvested in the business and therefore ensures that only the most profitable projects are selected. Dividends should not be an afterthought; they should be an integral part of good company management so that the businesses grow in a sensible manner.

The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

How important is the interest policy of the central banks for the fund? Are bond proxies making a comeback?

The key determinant of fund performance over the long term is the ability of the underlying holdings to deliver on their growth potential, not the direction of interest rates. The attraction of listed infrastructure is not limited to defensiveness, in our view; the asset class offers a wide array of growth opportunities to drive inflation-beating returns over the long run.

We strongly believe that our holdings should not be treated as bond proxies, which, by definition, offer a high yield with no growth. We aim to do more than merely capture defensive qualities which are highly prized in an environment of low interest rates. The growth focus of our strategy stands us in good stead to benefit from the long-term opportunities presented by the asset class in a more stable economic environment.

Past performance is not a guide to future performance.

Do you position the fund due to macro views? How is it positioned at the moment? Why should one invest in listed infrastructure/in your fund now?

Listed infrastructure is attracting attention because of its defensive characteristics at a time when uncertainty is clouding the short-term economic outlook. In my opinion, the outperformance of the asset class during turbulent times is not just a reflection of market sentiment, which can be fickle; the resilience of listed infrastructure is justified by solid fundamentals and the operating performance of individual companies. There is empirical evidence of the typically recession-proof nature of these business models, which arises from the critical nature of the underlying assets. For example, the cashflows generated by listed infrastructure businesses and the dividends paid from them remained relatively stable during the financial crisis before resuming their upward trajectory.

That said, it is important not to lose sight of the long-term nature of the asset class. The immediate macroeconomic environment has little bearing on the operational performance of infrastructure assets, which have the potential to generate stable and growing cashflows for several decades. Powerful trends in the global economy – and the growth afforded by these long-term trends – will have a greater influence on listed infrastructure companies and returns from the asset class over the long term. Renewable energy, transportation of the future, urbanisation, universal connectivity, water and waste management, and social and demographic shifts are just some of the themes driving the fund’s long-term performance.

The vagaries of economic cycles are a mere sideshow compared to the structural growth on centre stage. We believe now is as good a time as any to benefit from the abundance of long-term opportunities in an exciting asset class.

The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.

The MSCI ACWI Index is a target which the fund seeks to outperform. The index has been chosen as the fund’s benchmark as it best reflects the scope of the fund’s investment policy. The benchmark is used solely to measure the fund’s performance and does not constrain the fund’s portfolio construction.

The fund is actively managed. The fund manager has complete freedom in choosing which investments to buy, hold and sell in the fund. The fund’s holdings may deviate significantly from the benchmark’s constituents.

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The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
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