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The challenge – and by extension, the opportunity – posed by infrastructure is how broad an investment world it can encompass. So, where to even start? In this publication, we pin down what infrastructure means to fund buyers and how they are tapping into the opportunities they see. We also cross over into private market territory to analyse the world of infrastructure debt financing, as well as hearing from a sector stalwart about how he keeps his specific strategy ahead of the curve. Finally, we bring you the biggest and best names in terms of both scale and performance to see how strategies stack up over different timeframes. Chris Sloley Editor, Citywire Selector
Building towards something
Selector views
The role infrastructure ideas play in fund buyers’ plans
Digital infrastructure: Connecting people to a more sustainable future
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Macquarie’s Anthony Felton on riding an inflationary and regulatory wave
Manager profile
How infrastructure debt investors are reinforcing their investment cases
Debt dynamics
Listed infrastructure – looking beyond the storm
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Size and scale
How the biggest and best specialist strategies stack up
It is far better to drive change from the inside by having open and honest conversations with senior management and the board than to walk away and immediately lose any leverage for change
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Showtime for infrastructure debt
Claudio Vescovo, Glennmont
‘The more mature the sector or the technology or geography, the lower the risk perception and return. There is a tightening of returns in general because the perception of risk has decreased compared to when we started 15 years ago’
Pieter Welman, Barings
‘This is a bit of a longer challenge for the sector, but I do think overall it will perform very well through this crisis. However, it might be the first prolonged crisis for the sector’
Today’s macroeconomic challenges play to the strengths of this increasingly popular asset class and fund providers are innovating to make the most of the opportunity A stormy macroeconomic environment and a looming global recession have cast dark shadows over the financial world, but infrastructure debt managers now have a chance to shine. Infrastructure debt funds, particularly those focused on renewable energy, are thought to be well positioned at the moment, with rising rates translating into higher income, and soaring energy prices allowing borrowers to better service their debt. Asset managers have taken notice. In Europe, there are currently 18 funds raising capital, according to PitchBook data. In May this year, Natixis Investment Managers expanded its infrastructure debt platform after a number of investors signed sizeable mandates giving the firm €2.2bn in dry powder to deploy. Barings closed its inaugural target yield infrastructure debt strategy at $630m in August, and Glennmont Partners, a subsidiary of Nuveen, has raised €250m so far for its second energy transition credit fund, which is targeting €500m. According to the Global Infrastructure Hub, infrastructure debt provided an average annualised return of 6% at an average annualised risk of 3.3%, over the last decade. In comparison, government bonds issued by developed economies like the US, Canada and UK provided an average annualised return of 1.3%-2% at an average annualised risk of 2.1%-2.9%. A new approach The asset class seems attractive in the current environment, but managers need to be more innovative to generate higher returns in an increasingly mature area of the market, particularly with fixed income products offering investors better returns than they have in the past. ‘Our motto is equity-like returns with debt-like risk,’ said Claudio Vescovo, head of energy transition debt funds at Glennmont. But how to make that a reality? Vescovo said his team uses tools that are widely used in other sectors and applies them to infrastructure debt. A case in point is the use of securitisation, where long-term illiquid bank loans are converted into highly liquid tradable securities. They are also doing direct lending deals and trying to innovate in other areas, for example, by creating a green collateralised loan obligation.
‘The more mature the sector or the technology or geography, the lower the risk perception and return. There is a tightening of returns in general because the perception of risk has decreased compared to when we started 15 years ago,’ Vescovo said. ‘Now it’s more about finding attractive returns. We do that by being a pure player and we’ve been there so long, it’s easier to find pockets of value.’ Barings’ new co-mingled fund is also focusing on investing in renewables and related assets. The strategy invests in high yield debt, which according to Pieter Welman, head of global infrastructure at Barings, has the potential deliver returns in the high single digits. But he warned against companies that have too much leverage as they have refinancing risk. In addition, like most debt funds, infrastructure debt also came into its own mainly after the global financial crisis, so most of the funds haven’t gone through a prolonged period of stress and recession. ‘This is a bit of a longer challenge for the sector, but I do think overall it will perform very well through this crisis. However, it might be the first prolonged crisis for the sector,’ he said. However, he is still relatively bullish about default rates and is not expecting too many. Energy security Most of the infrastructure debt funds currently in the market have a keen focus on the energy transition. Discussions around this have come to the fore over the last year, with Russia’s invasion of Ukraine threatening gas supplies in Europe. Having energy security means being self-reliant and, in turn, that means at least doubling the capacity of more renewable power in Europe, said Vescovo. ‘The only way forward is to decrease imports. We can decrease dependency from Russia but then we become dependent on other countries. Energy security is being self-sufficient, decreasing the imports so increasing self-production. And among the sources of energy production, the only one we can think of as being domestic is renewables,’ he said. In his view people can argue in the short term about whether some energy needs need to be covered by gas or coal, but the only way to decrease dependency overall on other countries is by increasing renewable energy generation. ‘The European Commission is increasing their targets of renewable generation. We are around 40% now and looking to go to 80-90% in the next 20 years. That means doubling at least the capacity from where we are today.’ But of course, bureaucracy remains a challenge in many countries. Building a wind or solar farm can take six to 12 months, compared with the 10 years needed to bring a nuclear power plant online. ‘Every country in Europe has its own legislation and what you need to get the permit. It’s not a uniform approach and there is always the connection between states and different local authorities. One of the two sometimes becomes the bottleneck,’ Vescovo said.
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This might be the opportunity to reset and make the kind of intuitional changes and policy choices that will lead to a better, greener and more sustainable future
Audrey Ryan Support manager, Aegon Global Sustainable Equity Fund
Aegon Global Sustainability Equity Fund
Infrastructure is at an inflection point. Gone is the historic focus on infrastructure principally as a means of moving people and goods from A to B, and of providing electricity, heat and water. These aspects remain, but as part of a much broader understanding of what constitutes infrastructure today in the context of the transition to a more sustainable economy. Global society today is underpinned by more than traditional physical infrastructure: digital infrastructure is also integral to work and life. We believe this essential and fast-growing pillar of modern infrastructure is too important for investors to overlook. An enabling backbone of the economy The COVID-19 pandemic emphasised just how reliant the modern economy is on the seamless flow of data: global internet traffic rose by more than 40% in 2020 [1]. Without digital connectivity, global society would have been considerably less resilient during the lockdowns imposed to curtail the virus’ spread. A study by the Inter-American Development Bank has estimated that telecommunications infrastructure saved Latin America and the Caribbean countries between 20% and 25% of GDP during periods of restricted movement [2]. In economies with better digital infrastructure and more office-based jobs that can be undertaken remotely, their impact could have been greater. Persistent inequalities between and within societies were brought into sharp focus by the pandemic. Digital infrastructure can help bridge geographic and societal divides, and can promote equity by improving access to communications, finance, employment opportunities and other basic needs. A growing breadth of digital infrastructure is needed to accompany and facilitate technological innovation, and to enable more of the world’s population to participate more fully in economic opportunities. We believe this will, in turn, create long-term investment opportunities. A widening spectrum of opportunities There are several layers to the digital infrastructure that securely and reliably connects us to data, information, colleagues and loved ones. Our most visible interaction, as consumers, is often with companies that run communication networks that form their backbone. These networks range from fibre-optic broadband cables that run door-to-door to the masts and satellites that enable wireless mobile networks. According to World Bank figures, 57% of the world’s population had web access in 2019 [3]. Billions access the internet through their mobile phones, which play a critical role in sustainable development by democratising access to basic services. The roll out of 5G networks, which can transfer data up to 16 times faster than 4G, is expected to enable continued rapid growth in mobile data traffic this decade. Quicker connections enable more devices and machines to be digitally connected as part of the shift towards the Internet of Things. Technology company Cisco has forecast that machine-to-machine connections will rise from 6.1 billion in 2018 to 14.7 billion by 2023, driven by connected home appliances like white goods and by connected car applications, including vehicle diagnostics and navigation [4]. The rapid rise in global data traffic demands greater capacity to process and store it. The world’s accumulated digital data is forecast to have multiplied ten-fold from 4.4 zettabytes (one trillion gigabytes) in 2013 to 44 zettabytes in 2020 [5]. This is a long-term demand driver for companies providing cloud and data centre services. While data centres consumed 1% of global electricity use in 2020 (excluding cryptocurrency mining), economies of scale mean they are highly energy efficient when compared to local data processing [6]. Given the growing vulnerability of core services to disruption by cyber-attack, network security is also a vital and expanding part of digital infrastructure. The Center for Strategic and International Studies has estimated that almost US$600 billion is lost to cybercrime each year. Companies that provide protection of computer systems and networks from the theft of or damage to their hardware, software, or data, as well as from the disruption or misdirection of the services they provide, play an important role in protecting core infrastructure. Software as digital infrastructure Essential processes and services today often depend on software as much as hardware. An obvious illustration of this is software and systems that connect people and data in the era of remote working and digital collaboration. Software companies that make processes more efficient are critically important to the sustainable economy. Examples include enterprise resource planning software, which looks to optimise logistics, and product lifecycle management software, which looks to optimise operations. Performance simulation and data analysis creates a feedback loop that can continually improve efficiencies and deliver sustainability benefits. Another area is computer-assisted design software, which can help optimise the design, construction and management of buildings and infrastructure projects. By enabling better designed and more efficient buildings, design software companies can deliver significant environmental benefits over the long term. A vital role in the sustainable transition We rely on the assets and networks that underpin the digital economy to work, transact and communicate every bit as much as we rely on traditional infrastructure assets like railways and electricity grids. By enabling environmental efficiencies and improving access to basic services and opportunities, digital infrastructure plays a vital role in the sustainable transition. As the rapid growth in data traffic, processing and storage continues alongside the breadth of internet-based solutions, more investment will be needed in digital infrastructure assets. The UN Conference on Trade and Development (UNCTAD) estimates that an extra US$70 billion to US$240 billion needs to be invested in communications-related infrastructure investments each year this decade to realise the UN Sustainable Development Goals by 2030 [7]. As a specialist asset manager investing in the opportunities arising from the transition to a more sustainable economy, we believe the urgent need to correct this shortfall provides powerful tailwinds for companies focused on solutions to society’s evolving digital infrastructure needs.
[1] IEA, 2021: Data Centres and Data Transmission Networks [2] Inter-American Development Bank, 2020: The Impact of Digital Infrastructure on the Consequences of COVID-19 and on the Mitigation of Future Effects [3] World Bank, 2022 [4] Cisco, 2020: Cisco Annual Internet Report (2018–2023) White Paper [5] Financial Times, 2021: Big Data: reasons to be anxious, Pt 3 [6] IEA, 2021: Data Centres and Data Transmission Networks [7] UNCTAD estimates, 2020
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Disclaimer For professional investors only. The article is for information purposes only. The statements and opinions expressed are those of the author and may not be relied on by any person. The information and any opinions contained in the article have been compiled in good faith, but no representation or warranty, express or implied, is made to their accuracy, completeness or correctness. Impax, its officers, employees, representatives and agents expressly advise that they shall not be liable in any respect whatsoever for any loss or damage, whether direct, indirect, consequential or otherwise however arising (whether in negligence or otherwise) out of or in connection with the contents of or any omissions from the article. The article does not constitute an offer to sell, purchase, subscribe for or otherwise invest in units or shares of any fund managed by Impax and may not be relied upon as constituting any form of investment advice. This article is prepared and issued by Impax Asset Management Limited and Impax Asset Management (AIFM) Limited (each of which is authorised and regulated by the Financial Conduct Authority in the UK) OR Impax Asset Management Ireland Limited which is authorised and regulated by the Central Bank of Ireland.
The role of infrastructure in a traditional portfolio can be complex. Do you use it for tactical additions or for stable returns? Chris Sloley spoke to fund buyers to find out Exposure to infrastructure – either direct or through related equities – is an often-overlooked area of allocation, because, in the words of Macquarie fund manager Anthony Felton, ‘infrastructure is everything’. The sector covers a wide array of ideas and investment opportunities, so what is the best way for more generalist investors to make use of it? Linsay McPhater, a senior portfolio manager within alternatives at Nordea, believes infrastructure isn’t as far removed from other alternative ideas as many people might think. The fund selector said its core ideas – namely offering diversification and low correlation – make it an attractive area to have at least some degree of exposure to. ‘Many infrastructure investments have monopolistic characteristics and deliver essential services to society, which are underpinned by regulation, concession arrangements or contractual agreements,’ she told Citywire Selector. ‘In addition, the income yield is typically a significant component of investment returns, and these characteristics generally allow private markets infrastructure investments to perform well on a relative basis throughout the economic cycle. One thing fund buyers like is certainty, especially at a time of rising rates, rampant inflation and economic and political instability. Again, McPhater said many infrastructure strategies can provide that. ‘The predictable risk profiles and strong, consistent cashflows give investors comfort throughout the more turbulent periods. Many infrastructure assets have some form of innate inflation linkage, either from clauses in the contracts that govern the assets’ revenue or from regulatory frameworks that may contain pass-through mechanisms. Therefore, they can act as an inflation hedge.’ Wouter Weijand, chief investment officer of Providence Capital in the Netherlands, also likes infrastructure’s diversification benefits. ‘We see infrastructure as an attractive asset class and we use a private assets fund manager to actively manage this as a global strategy,’ he said. ‘Infrastructure is a very well diversified real assets play in this inflationary environment. The energy-generating element in particular is, to some extent, an inflationary hedge. We did not know when inflation would start to bite but felt that zero bond yields could not last forever and started building exposure here in 2018.’
‘There is no regulated player that can really cater to these big institutions yet, so crypto ETPs are the only way they can invest in the underlying market in a secure way and through their regular channels’
Roxane Sanguinetti, GHCO
Something to build on
Hector McNeil, HanETF
Chris Sloley Editor, Citywire Selector
Linsay McPhater, Nordea
‘Many infrastructure investments have monopolistic characteristics and deliver essential services to society, which are underpinned by regulation, concession arrangements or contractual agreements’
Wouter Weijand, Providence Capital
‘Infrastructure is a very well diversified real assets play in this inflationary environment. The energy-generating element in particular is, to some extent, an inflationary hedge’
But, how much? McPhater’s team has also put capital to work in this area and allocated to infrastructure on behalf of private clients being served through Nordea Wealth Management. ‘We have an allocation to infrastructure of 5% within the client model portfolios. ‘We expect this allocation to only increase going forward in order to take advantage of megatrends including decarbonisation, demographics and data. Overarching these trends is sustainability and impact investing and clients can gain exposure to energy transition and clean sanitation through infrastructure investments.’ This is largely through a white labelling agreement between McPhater’s firm Nordea and CBRE Clarion, a global investment management firm focused on listed and private market allocations to real assets. The Nordea 1 – Global Listed Infrastructure fund, as it is formally known, is overseen by the CBRE team of Jeremy Anagnos, Dan Foley and Hinds Howard. The fund has performed well on a five-year basis, returning 30.1% in US dollar terms at a time when the average strategy in the sector delivered 22.8% over the same timeframe to August 2022. Another angle One person who has walked the line between selection and allocation in this space is Ulla Agesen. Agesen was previously head of alternative investments at Nykredit but switched to Copenhagen-based boutique NIO earlier this year to launch an infrastructure-focused fund of funds offering. ‘I think there is always potential in infrastructure, but then I am biased,’ she said. ‘When I was at Nykredit I saw the benefits of adding exposure here and I built up our overall alternatives capacity to more than €1bn, with a healthy allocation to infrastructure.’ Echoing both McPhater and Weijland, Agesen said the diversification element of infrastructure means it is ‘an allocation not just for now but one that makes sense for most markets’. Where she takes some issue with the received wisdom around the asset class is on inflation. ‘In my view, the discussion about the benefits of infrastructure as an inflationary hedge might be an oversimplification. I think you need to look at these things on a one-to-one basis and assess the assets in that light. ‘That said, right now there is a significant need for infrastructure improvements in general but also to help aid the sustainability agenda, so there is a lot of potential here.’
Ulla Agesen, NIO
‘In my view, the discussion about the benefits of infrastructure as an inflationary hedge might be an oversimplification. I think you need to look at these things on a one-to-one basis and assess the assets in that light’
The role of infrastructure in a traditional portfolio can be complex. Do you use it for tactical additions or for stable returns? Chris Sloley spoke to fund buyers to find out Exposure to infrastructure – either direct or through related equities – is an often-overlooked area of allocation, because, in the words of Macquarie fund manager Anthony Felton, ‘infrastructure is everything’. The sector covers a wide array of ideas and investment opportunities, so what is the best way for more generalist investors to make use of it? Linsay McPhater, a senior portfolio manager within alternatives at Nordea, believes infrastructure isn’t as far removed from other alternative ideas as many people might think. The fund selector said its core ideas – namely offering diversification and low correlation – make it an attractive area to have at least some degree of exposure to. ‘Many infrastructure investments have monopolistic characteristics and deliver essential services to society, which are underpinned by regulation, concession arrangements or contractual agreements,’ she told Citywire Selector. ‘In addition, the income yield is typically a significant component of investment returns, and these characteristics generally allow private markets infrastructure investments to perform well on a relative basis throughout the economic cycle. One thing fund buyers like is certainty, especially at a time of rising rates, rampant inflation and economic and political instability. Again, McPhater said many infrastructure strategies can provide that. ‘The predictable risk profiles and strong, consistent cashflows give investors comfort throughout the more turbulent periods. Many infrastructure assets have some form of innate inflation linkage, either from clauses in the contracts that govern the assets’ revenue or from regulatory frameworks that may contain pass-through mechanisms. Therefore, they can act as an inflation hedge.’ Wouter Weijand, chief investment officer of Providence Capital in the Netherlands, also likes infrastructure’s diversification benefits. ‘We see infrastructure as an attractive asset class and we use a private assets’ fund manager to actively manage this as a global strategy,’ he told Citywire Selector. ‘Infrastructure is a very well diversified real assets play in this inflationary environment. The energy-generating element in particular is, to some extent, an inflationary hedge. We did not know when inflation would start to bite but felt that zero bond yields could not last forever and started building exposure here in 2018.’
Florian Ginez Associate Director, Quantitative Research, WisdomTree
It’s been a perfect storm. Listed infrastructure has provided a rare safe haven in a turbulent year for financial markets, where equities and bonds alike have been battered by the new realities of rampant inflation, higher interest rates and the prospect of a recession. Listed infrastructure’s defensive qualities, combined with the ability to offer inflation protection by way of index-linked revenue and structural cashflow growth, have provided comfort in these tempestuous times. But we strongly believe that listed infrastructure offers compelling attributes long after the storm clouds have dispersed. We are steadfast in our belief that listed infrastructure may provide an ideal solution, not only for the here and now, but for many years to come. Listed infrastructure’s defensive characteristics, endorsed by the critical nature of the underlying assets, are widely acknowledged. We rely on infrastructure throughout the course of our daily lives, regardless of the economic situation. The reliable and growing cashflows generated by infrastructure assets, the backbone of the global economy, can provide resilience in uncertain times as well as diversification benefits for investors’ portfolios. But we strongly believe that listed infrastructure can offer more than just defensiveness; it is an asset class blessed with multiple growth avenues. Inflation provides many listed infrastructure companies, whether directly or indirectly, with a vital source of growth, which is particularly pertinent in the current environment. But inflation is not the only source of growth. Listed infrastructure is a beneficiary of long-term structural trends, such as renewable energy, digital connectivity and demographics – powerful themes which we believe will endure for many decades to come. Rather than being a benefit, inflation has been cited as a potential risk for listed infrastructure and we would agree that strategies consisting mainly of bond proxies may struggle in an environment of rising rates and higher bond yields. Bond proxies, with no growth and high yields, are by their very nature more susceptible to the market’s capricious views on interest rates. By contrast, we expect the long-term effects for a growth-focused strategy to be considerably different. With the asset class exposed to a variety of powerful tailwinds, we advocate a modern approach to listed infrastructure which focuses on beneficiaries of long-term growth and invests beyond the traditional realm of utilities, energy infrastructure and transport, to incorporate social infrastructure, which includes facilities for health, education and civic services, as well as evolving infrastructure which supports our increasingly digital economy. Dividend growth in excess of G7 inflation seems an attainable target, in our view, with average annual increases in the region of 5-10% over the long term. Listed infrastructure can offer benefits beyond a financial context, in our view. From a societal perspective, we see infrastructure as uniquely positioned to provide long-term solutions for the pressing issue of energy security. The geopolitical situation arising from Russia’s military intervention in Ukraine has highlighted Europe’s heavy reliance on Russian gas, and the consequent surge in gas prices has underscored the importance of not just alternative sources of supply, but alternative sources of energy. We strongly believe that natural gas has a pivotal role to play as a key transition fuel in the displacement of coal to combat climate change, but it is also abundantly clear that renewables provide a more sustainable source of power generation over the long term. Infrastructure is front and centre of the long journey towards net zero carbon, a view endorsed by the United Nations. Power generation from traditional energy sources attracts plenty of scrutiny as a significant contributor of greenhouse gas emissions, but the flipside of this conundrum is that infrastructure is critical to solving the current predicament: utilities have a huge role to play in the energy transition by reducing carbon emissions and increasing renewables within the energy mix. The attractions of infrastructure, particularly in the listed sphere, have not gone unnoticed. We have seen increasing corporate activity across the asset class, with many listed infrastructure companies – from transition companies in utilities (ContourGlobal), to airports in transport (Sydney Airport), to data centres in digital infrastructure (CoreSite) – receiving takeover bids. We believe that these symbolic events provide a clear indication that the reliable and growing cashflows from infrastructure assets are going cheap in the stockmarket. Investors with a long-term time horizon, such as those in the private sphere, are starting to take notice and act on their convictions. In the current environment where valuation has re-emerged as a key determinant of investment returns, the increased volatility in the stockmarket is presenting buying opportunities, in our view. The indiscriminate selloff in the real estate sector, driven by perceived interest-rate sensitivity, has provided attractive entry points for listed infrastructure companies structured as real estate investment trusts (REITs). Our two new purchases this year both stem from the real estate sector: Segro, based here in the UK, provides our first foray into e-commerce infrastructure, while Alexandria Real Estate, a US REIT, provides access to life science infrastructure, the critical assets behind the research and development of drugs to address society’s ongoing medical needs. Both companies benefit from powerful structural trends, which we believe will support continued growth over the long term. We remain as optimistic as ever about the long-term growth opportunities in listed infrastructure.
The views expressed in this document should not be taken as a recommendation, advice or forecast. Please note that 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. Further risks associated with this fund can be found in the fund’s Key Investor Information Document For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London, EC3M 5AG. Registered in England and Wales. Registered number 90776.
Alex Araujo Fund Manager, M&G Global Listed Infrastructure Fund
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The value of investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. Past performance is not a guide to future performance.
Infrastructure for climate action, United Nations Office for Project Services (UNOPS), 2021
This is a moment of unprecedented opportunity for infrastructure to shape the sustainable development of our planet, driven by the urgency of the climate crisis
The ethical investor
The moderate investor
The active investor
The innovative investor
If your client wants their investment portfolio to reflect their strongly held values and beliefs, consider ethical or values-based investing. Some of these funds were originally faith-based and have their roots in religious movements. Others are broader. They will typically use negative screening to remove companies in industries that might be viewed as objectionable from an ethical or moral perspective. They might screen out companies associated with alcohol, tobacco, gambling, pornography, animal testing, weapons and nuclear power, for example. This type of investing is typically quite personalised, as everyone’s moral compass is calibrated differently. What is acceptable to one investor might not be to another.
If your client requires their investments to stick closely to traditional benchmarks but they are happy to screen out the most unsustainable companies, consider an ‘ESG lite’ approach. By investing in the world’s largest companies, there will be some compromises on ESG issues. These companies will not score highly on every factor, although there is a great deal changing, especially since the pandemic. A moderate approach uses negative screening to avoid companies with the lowest ESG scores. This strategy lends itself to investing in less expensive ESG-themed ETFs and index trackers.
If your client wants to choose companies that rank as the most sustainable according to ESG metrics, as opposed to excluding the ones that rank lowest, positive screening could be the best approach. ESG strategies using positive screening seek out companies that are the best in class and score highly on a range of different ESG metrics, including environmental impact, treatment of workers and business ethics. They also use negative screening to exclude companies with the lowest ESG scoring from their investment universe.
If your client wants their investments to support companies creating solutions to world problems, impact investing could be the strategy to follow. The aim of impact investing is to make a positive and measurable impact on society or the environment, as well as generating a financial return. Some impact investing focuses on funding specific projects, such as microfinance funds to create affordable housing, or green bonds to raise money for a clean water initiative. This may mean the portfolio is more concentrated, and there is a good chance it is riskier too. Investors in this space need to be willing to accept more risk and less diversification.
Three trends that will set infrastructure apart
Anthony Felton, Macquarie Group
‘Infrastructure is also sort of unique in the sense that it benefits hugely from regulation. Other asset classes seem to contend with regulation, while infrastructure investment fundamentals improve with it’
‘Inflation is explicitly factored into revenues for infrastructure assets in a way it isn’t with other asset classes. For example, regulatory frameworks explicitly state inflation can be passed through into user tariffs to compensate for higher operating and financing costs. ‘Concession contracts established between governments and the private sector set terms that facilitate investment in long-life capital-intensive assets providing essential services. Inflation-linked revenues are frequently adopted to insulate investors from rising costs,’ he said. Regulation is a point Felton returns to throughout the interview. He believes infrastructure is also a slightly contrarian investment because it embraces regulation, while other areas, notably technology, often take a more combative stance. ‘Infrastructure is also sort of unique in the sense that it benefits hugely from regulation. Other asset classes seem to contend with regulation, while infrastructure investment fundamentals improve with it.
Macquarie Group’s Anthony Felton believes regulation can help shape future investment opportunities, but the emerging world is going to need a big helping hand I always say to my kids – infrastructure is all around us.’ Anthony Felton is using the vantage point from London’s Royal Festival Hall to highlight the infrastructure that underpins the UK’s capital. Boats packed with tourists and freight work their way up the Thames, trains rattle over Hungerford Bridge into Charing Cross station and cranes punctuate the horizon as building work continues across the city. Felton has invested in infrastructure equities at Macquarie Group since 2004 and the investment case for allocating capital to these projects has evolved and strengthened during his career. ‘If we went back to 2004, when I started investing in listed infrastructure, you can see some companies which have evolved and met longer-term needs in an impressive way,’ he tells Citywire Selector. ‘SSE, previously Scottish and Southern Energy, for example, has become a leading player in renewables having spotted that trend long ago and built towards it, but it is, crucially, a long-term journey.’ Three pillars of the future Felton believes there are three key themes which will drive the next steps in this adventure: net-zero emissions ambitions, post-Covid recovery and inflation. Felton expanded on the final one as many investors are currently battling against it, while investors in infrastructure are embracing the phenomenon.
Siri Christiansen Reporter, Citywire Selector
‘By that I mean, regulated utilities, such as water utilities, offer cashflow stability driven by known terms of investment in the network. This helps to balance the needs of investors and customers of natural monopolies leading to higher services standards and lower customer bills than would otherwise be the case.’ This is particularly pertinent at a time when utilities are such a politically charged talking point. Many nations are contending with rising energy prices and calls for increased taxation of energy companies. However, Felton hopes to adapt to this development by focusing on assets that lean towards the push for net-zero emissions. ‘There is a significant transition towards electrification underway and infrastructure assets have an important role to play,’ he says. ‘Beyond the immediately apparent shift towards EVs, the underlying modes of delivery of primary energy from production to end users will need significant investment to cater to demand growth and a shift away from fossil fuels towards renewable power generation. That has huge potential in particular over the next decade.’ This chimes with Felton’s idea of being a ‘pure-play’ operator within infrastructure, as his funds invest in companies involved in electricity generation and the networks themselves rather than loosely affiliated stocks. The Macquarie Sustainable Global Listed Infrastructure fund, which Felton runs with Brad Frishberg, is a case in point. Launched in 2010, the strategy’s largest sectoral allocation is to electric utility. This sector accounts for 35% of the Luxembourg-domiciled fund’s exposure, as of the end of August 2022, while the fund’s benchmark, the S&P Global Infrastructure index, allocates 31.2%. Rail and transportation is an even more significant overweight, at 14.3% of the portfolio, versus the benchmark’s 3.5% weight. Dovetailing with his dynamic view across the River Thames, Felton’s favourite hunting ground is the UK, where 19.8% of the fund’s holdings are listed, as opposed to 2.1% in its benchmark. The shape of things to come Felton said the traditional nature of infrastructure means some generalists can fixate on the existing market and sometimes forget about the global energy transition’s long-term potential. ‘One thing we note is the scale of the investment opportunity,’ he said. ‘As we are investing in the energy transition for example, we note the existing level of installed capacity across our coverage universe is around 400GW, a figure equal to around four times the installed capacity of the UK. These are businesses of both significant scale and also significant contribution to decarbonisation.’ The idea of decarbonisation feeds into another of Felton’s core ideas – the social contract. Integral to his investment strategy is the idea that the infrastructure should have a societal purpose. ‘By that, I mean we like companies which can help transform and improve the community or country they are in. This is a two-fold benefit, as they tend to be well-run, long-term companies but also those that are working well with the regulator and, in some cases, the government, to make better and bigger projects come to fruition.’ For this reason, Felton is mainly drawn to investment opportunities in the developed world, as the emerging markets currently lack the scale or tick the necessary quality boxes he demands. That, however, could change although Felton believes significant improvements will be needed in the developing world to ensure infrastructure becomes a source of global good. ‘We currently see opportunities in both developed and emerging markets. Our primary areas of focus are valuation and quality factors, underpinning long-term capital growth whilst minimising risks of capital loss. ‘Emerging markets offer strong demand fundamentals, but we need to have visible regulation and governance practices to become comfortable with a potential listed infrastructure investment. A fundamental part of what we do is look long term.’ Change is afoot Many markets are currently going through a period of adjustment. Returning to the three key areas Felton initially highlighted, the post-pandemic world is different to the investible universe he encountered in early 2020, for example. However, signs of change were already evident before words such as ‘lockdown’ moved into the mainstream lexicon. ‘We did notice some changing trends in the period prior to the pandemic. We heavily reduced transport assets in early 2020, which involved either selling down or selling out of some toll road and airport positions, for example. ‘In 2020, we saw those businesses become more challenged as traffic fell. However, we are seeing a rebound in passenger volume now to previous levels, even above 2019 levels, in some cases. We haven’t gone back in aggressively due to valuations. ‘Infrastructure is well placed to deliver earnings growth from the recovery in GDP-sensitive assets,’ he said.
The strategies setting the pace
Managers: Nick Langley, Shane Hurst, Charles Hamieh, Daniel Chu Fund: Legg Mason CB Glb Infras Inc X USD Inc Return: 4.33% (one-year sector average to end of August 2022 was a 3.21% loss) Current strategy The best-performing fund over the shortest timeframe is the Legg Mason ClearBridge Global Infrastructure Income fund run by an experienced quartet. The latest factsheet, which runs to the end of August 2022, said the $414m fund is largely exposed to the electricity sector, with around one-third of allocations positioned here. The managers have a relatively high-conviction approach, holding just 33 positions. The largest of these is Spanish energy provider Iberdrola, which is a 4.85% allocation, while Enbridge, a Canadian pipeline company, and Public Service Enterprise Group, a New Jersey-based diversified energy company, are joint second-largest bets. Franklin Templeton, which owns both Legg Mason and ClearBridge, said the fund’s emphasis has evolved to focus on regulated and contracted assets, which means poles, wires and pipes feature prominently in allocation decisions. The fund also favours defensive assets which provide high income with low GDP exposure.
Infrastructure can take on many forms, but how does the opportunity set evolve over time? Here we take a closer look at the best-performing cross-border funds over various timeframes and see how the biggest player stacks up
One-year leader
Nick Langley
Shane Hurst
Charles Hamieh
Daniel Chu
Manager: Colm O’Connor Fund: KBI Glb Sust Infras A EUR Acc Return: 46.02% (three-year sector average to end of August 2022 was 17.44%) Current strategy Setting the pace over a more medium timeframe is Colm O’Connor, the Citywire AA-rated lead manager on the €1.37bn KBI Global Sustainable Infrastructure fund. O’Connor has almost trebled the sector average return over the analysis period and nearly doubled that of his nearest rival – the CS (Lux) Infrastructure Equity fund, which has delivered 25.19% (more on that later). O’Connor works with a ‘mega-themes’ mentality, looking at ideas that could generate returns over a 20-year time horizon. Such themes include the push towards sustainable natural resources, which could cover regulatory change, infrastructure spending and technological change. His three-year numbers indicate he has harnessed a number of these trends in the near-term. However, the fund’s latest market commentary, which covers the month of August, indicates O’Connor has had plenty of headwinds to contend with. ‘The fund underperformed over the month amid heightened uncertainty over European power prices. ‘Continued uncertainty over Russian gas flows to Europe lead to further price escalation and speculation that governments will have to intervene with windfall taxes and prize freezes. As a result, more commodity-sensitive end markets, such as traditional energy, outperformed and utilities struggled.’ Utilities form the bulk of the fund’s exposure at present, accounting for 46% of total assets, while asset owners make up 32% and infrastructure-focused capex accounts for around 18%. The US market has been the favoured hunting ground, with 40.7% of assets listed in the North American market.
Three-year leader
Colm O’Connor
Managers: Werner Richli and Heinz Tschabold Fund: CS (Lux) Infrastructure Equity IB USD Return: 41.67% (five-year sector average to end of August 2022 was 18.68%) Current strategy Citywire + rated pair Werner Richli and Heinz Tschabold are leading the charge over five years, while also putting in strong three-year numbers, as referenced in the previous entry. The $785m fund has doubled the sector average, and edged ahead of the Cohen & Steers Sicav Global Listed Infrastructure fund, which returned 36.3%. The duo, who have co-run the strategy since Tschabold was added alongside Richli in July 2019, have a core focus on utility assets, which account for more than a third of total exposure. Second up is industrial bets, which make up around one quarter, followed by broad energy investments, which make up a further 20% of total investments, according to Morningstar data. Much like their various peers, the US market is the preferred hunting ground, with almost half of the fund’s stock holdings based here. The largest single position, according to Morningstar data that runs to the end of September rather than August 2022, is Cheniere Energy, which is a 6.07% allocation, ahead of real estate company Crown Castle International (4.39%).
Five-year leader
Werner Richli
Heinz Tschabold
Managers: Manoj Patel and Francis Greywitt Fund: DWS Invest Global Infrastructure AUM: $3.65bn (sector average size is $290m) Current strategy The DWS Invest Global Infrastructure is more than 10 times bigger than its average peer, and is one of just two cross-border funds to have more than $3bn in assets under management – the other being Alex Araujo’s M&G (Lux) Global Listed Infrastructure fund. On a one-year basis the strategy returned 2.22%, rising to 21.26% over three years and 30.59% over five. This means, despite, or perhaps because of its size, the fund outperformed its sector average over every time frame in this analysis. Patel and Greywitt focus on transportation, energy, water and communications as four distinct areas of investment. This large-cap blend approach has led them to allocate quite broadly, with 22.4% in oil and gas storage and transportation at a sector level, ahead of 20% in multi-utility investments. The largest single allocation at the end of August 2022 was to specialised Reit American Tower, at 7.90% exposure. In their latest market update, the duo said: ‘In the intermediate term, robust fundamentals and inorganic growth opportunities continue to provide support for Tower on a global basis. ‘We continue to seek the best risk-adjusted returns and favour “pure-play” companies with strong balance sheets, agile management teams, stable demand, and quality business models which may provide a degree of insulation from external factors.’
The biggest
Manoj Patel
Francis Greywitt
