Global listed infrastructure rallied in the June quarter as concerns for global trade and rising geopolitical uncertainty drew investors towards defensive assets. Leading pipeline companies announced plans to simplify corporate structures, after US tax reform reduced the appeal of widely used Master Limited Partnership (MLP) vehicles.
Sector and region performance
Pipelines outperformed on greater clarity for future projects, the prospect of simpler corporate structures, and undemanding valuation multiples. Surging production growth provided a favourable operating environment. North American Railroads announced pleasing earnings numbers, underpinned by healthy volume trends and strong operational performance. Utilities delivered positive returns on renewed demand for stable, income generative assets.
However, Ports lagged on concerns that US-China trade tensions may cause volume growth to slow from the healthy levels achieved in 2017 and at the start of 2018. Airports delivered mixed returns on concerns that strong volume growth of recent years may be levelling off. Beijing Airport (not held) dropped sharply after the Chinese government revoked a refund mechanism used to compensate the airport for construction costs.
The Fund initiated a position in Spanish-listed Ferrovial, a globally diversified infrastructure concession, construction and services company. Its flagship infrastructure assets include holdings in London’s Heathrow Airport and Toronto’s 407 ETR toll road concession. Earnings disappointments in its construction and services business segments have overshadowed the firm’s exceptional infrastructure assets and material growth optionality, causing the company to trade at a material discount to intrinsic value.
The Fund bought shares in Severn Trent, one of the UK’s largest water utilities. Severn Trent is a stable, defensive business which pays a ~4% dividend yield and earns regulated returns linked to UK RPI. Over the past year, concerns about the opposition Labour Party’s renationalisation plans have weighed on the stock. We expect improving regulatory clarity and receding re-nationalisation concerns to support share price outperformance.
The Fund sold Japan Airport Terminal after pleasing full year earnings numbers pushed its share price sharply higher; and divested Spanish tollroad operator Abertis as the Atlantia / ACS takeover saga drew close to a positive resolution.
The Fund invests in a range of sustainable listed infrastructure assets including toll roads, airports, ports, railroads (both passenger and freight), 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. A focus on sustainability can help deliver positive risk adjusted returns. It can create opportunities for positive performance; generating ideas as well as lowering the overall risk profile of a portfolio through a better understanding of environmental, social and governance (commonly referred to as ‘ESG’) related risks.
Our outlook for Global Listed Infrastructure is positive. The asset class consists of stable, long life assets, and continues to deliver a reliable yield of between 3% and 4% per annum. Many infrastructure assets are insulated from inflation by regulation, concession terms or contracts that are explicitly linked to the inflation rate. Several sectors are benefitting from structural growth drivers such as urbanisation (Tollroads) and the increasing mobility of communication (Towers).
As well as sound fundamentals, we expect a number of additional factors to be supportive of returns from Global Listed Infrastructure. The listed infrastructure investment universe continues to broaden, which is likely to stimulate further interest in the asset class. China Tower, which operates the towers of China’s three state-backed telecoms providers, recently announced plans to list in what could be a US$10 billion IPO. Tollroad operators Ferrovial and Transurban are pursuing their Express Lane strategies in the US - a politically palatable way to involve private sector capital in US highway infrastructure. We anticipate that both companies will be major players in this space over the next three to five years, further diversifying and improving our opportunity set.
In addition, the ongoing asset allocation shift by large pension and sovereign wealth funds into real assets in general, and into infrastructure specifically, should provide a tailwind for asset class valuations. This could happen directly, through allocations to Listed Infrastructure funds; or indirectly, through takeovers of listed companies by Direct Infrastructure funds.
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