Global listed infrastructure gave up ground during the March quarter. Rising geopolitical tension, regulatory headwinds and higher bond yields weighed on most infrastructure sectors.
Global listed infrastructure gave up ground during the March quarter. Rising geopolitical tension, regulatory headwinds and higher bond yields weighed on most infrastructure sectors. President Trump’s 2018 State of the Union address included proposals to support additional infrastructure spending, although a lack of detail left observers underwhelmed.
The Fund fell -9.7% over this period after fees, compared to a return of -7.9% by its benchmark index¹. Global equities² ended the quarter -4.8% lower.
Annual Performance (% in GBP) to 31 March 2018
Sector and region performance
Gas and Electric Utilities were among the best performing infrastructure sectors for the period, helped by demand for regulated earnings profiles and stable business models. Towers gained as US operators’ structural growth and domestically focused businesses offered a haven from geopolitical uncertainty. Railroads held up well, as recent tax cuts were reflected in higher profits for US freight rail operators.
However, reduced investor risk appetite and rising concerns for global trade weighed on the Ports sector. Plans by the US Federal Energy Regulatory Commission to adjust the way that regulated tariffs for some interstate pipelines are calculated affected Pipelines. Satellites dropped as structural headwinds continued to weigh on the sector.
Investors’ risk-off mood made Japan the best performing infrastructure region. The UK lagged as political and regulatory uncertainty weighed on its utility companies.
The Fund bought shares in TransCanada, which operates one of North America’s largest energy infrastructure portfolios. The company forecasts its distributions to grow at a compound annual growth rate of between 8% and 10% per annum through to 2020. The pipeline sector remains out of favour, despite improving fundamentals, presenting an opportunity to gain exposure to these assets at an appealing entry price.
The Fund also bought shares in Mexico City-focused toll road operator Pinfra, a stable, conservatively run business with a strong balance sheet. The value of the company’s long (32 years) average concession length has, in our view, been underestimated by the market. Pinfra is set to benefit from demand growth as population growth and rising car ownership rates place public roads in Mexico City – already one of the world’s most congested cities – under increasing pressure.
Holdings in US freight rail operator Union Pacific were sold after 2017’s buoyant US economy and corporate tax cuts pushed its share price up to optimistic valuation multiples. A position in Mexican airport operator, GAP, was also sold after rapid volume growth across its portfolio of Mexican airports underpinned substantial outperformance during the Fund’s holding period.
The Fund invests in a range of global listed infrastructure assets including toll roads, airports, ports, railroads, utilities, pipelines and mobile towers. These sectors share common characteristics, like barriers to entry and pricing power, which can provide investors with inflation-protected income and the potential for strong capital growth over the medium-term.
Toll Roads remain the Fund’s largest sector overweight. These are high quality companies with stable cash flows, high operating margins and effective barriers to entry. European toll roads are currently going through an earnings upgrade cycle, as improving economic conditions support consistent volume growth in France, Spain and Italy. Peers in China and Brazil operate high growth toll roads with well-established concession agreements, providing an essential service to some of the world’s most densely populated areas.
The Fund holds positions in several North American energy pipeline stocks. Despite improving fundamentals and a back-to-basics approach focused on sensible growth expectations, the sector remains out of favour. This has provided an opportunity for the Fund to build positions in companies that own unique and long life energy infrastructure networks, and which have traded down to appealing valuation multiples.
On a more cautious note, the Fund remains underweight airports and some US utilities, which continue to trade at valuations that we find difficult to justify based on company fundamental.
¹ FTSE Global Core Infrastructure 50/50
² Based on MSCI World Net Total Return Index, GBP
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