Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.
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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.
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Please read the following important information for First Sentier Global Listed Infrastructure Fund
• The Fund invests primarily in global listed infrastructure and infrastructure-related equity securities or equity related securities worldwide. Investments in infrastructure projects may involve risks including projects not being completed on time and within budget, changes in environment laws and regulations.
• The Fund’s investments may be concentrated in a single and limited/specialist sector or in fast growing economies which may have higher volatility or greater loss of capital than more diversified portfolios. The Fund may also expose to RMB currency and conversion risk.
• Small/ mid-capitalisation securities may have lower liquidity and their prices are more volatile to adverse economic developments.
• The Fund may use FDIs for hedging and efficient portfolio management purposes, which may subject the Fund to additional liquidity, valuation, counterparty and over the counter transaction risks
• For certain share classes, the Fund may at its discretion pay dividend out of capital or pay fees and expenses out of capital to increase distributable income and effectively a distribution out of capital. This amounts to a return or withdrawal of your original investment or from any capital gains attributable to that, and may result in an immediate decrease of NAV per share.
• It is possible that a part or entire value of your investment could be lost. You should not base your investment decision solely on this document. Please read the offering document including risk factors for details.
A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at August 2021
Global Listed Infrastructure gained in August as investor sentiment remained positive, despite evidence of supply chain disruption and labour market disconnects alongside the ongoing spread of Delta variant coronavirus. The FTSE Global Core Infrastructure 50/50 index gained +2.2%, while the MSCI World index^ ended the month +2.5% higher.
The two best performing infrastructure sectors for a second consecutive month were Electric Utilities (+4%) and Water / Waste (+3%). US electric utilities were supported by a positive June quarter earnings season, and a renewed focus on their longer term opportunities to invest in transmission infrastructure and renewables. Towers / Data Centers (+3%) continued their strong run as structural growth characteristics remained in demand. The worst performing infrastructure sector was Gas Utilities (-1%). Chinese gas utilities underperformed after June quarter earnings results from ENN Energy (-5%, not held) failed to meet the market’s bullish growth rate expectations.
The best performing infrastructure region was Asia ex-Japan (+6%). Improving investor sentiment underpinned share price gains for the region’s airports; while its port operators were supported by robust volume growth. The worst performing infrastructure region was Latin America (-2%). A clash between Brazil’s president and its judges raised concerns for the country’s political stability ahead of the country’s 2022 presidential election, and weighed on the country’s infrastructure stocks.
^ MSCI World Net Total Return Index, USD
Fund performance
The Fund returned +1.3% after fees1 in August, 91 basis points behind the FTSE Global Core Infrastructure 50/50 Index (USD, Net TR).
Cumulative performance in USD (%) 2
Calendar year performance in USD (%) 2
Asset allocation (%) 2
Top 10 holdings (%) 2
The best performing stock in the portfolio was UK utility SSE (+13%), which operates regulated electricity transmission and distribution networks in Scotland and southern England, as well as developing some of the world’s largest offshore wind farms. Reports that activist Elliott Investors had built a position in the company sparked hopes that SSE may now seek to unlock value by separating the fast-growing renewables segment from its regulated utility businesses.
US utilities represented another area of strength in the portfolio, aided by favourable regulatory developments. Utility operator and renewables leader NextEra Energy (+8%) drew close to agreeing positive terms for the allowed earnings of its Florida Power & Light utility over the next four year period. Although final approval is still pending, the company looks set to continue its strong track record of constructive agreements in this important jurisdiction. Midwest operator Evergy (+6%) gained on strong June quarter earnings, and as investors remained positive on the firm’s five-year business plan focused on growing earnings and increasing the proportion of renewables in its generation mix. Exelon (+6%), a substantial Northeast and Midwest utility with extensive nuclear generating capacity, gained as investors took the view that an Illinois energy bill, currently being negotiated by the state’s legislature, would be likely to include provisions of financial support for the company’s nuclear power plants.
Data centre operator CyrusOne (+8%), whose predictable cashflows are underpinned by multi-year contracts with enterprise and hyperscale customers, gained as investors favoured assets with less sensitivity to the risk of coronavirus-related disruption. Italian tower company Inwit (+6%) which operates a portfolio of high quality Italian towers (spun off previously from Telecom Italia and Vodafone) and US-listed peers SBA Communications (+5%) and American Tower (+3%) were supported by similar sentiment.
Swiss airport operator Flughafen Zurich (+5%) increased as ongoing strength from its property and retail segments, along with potential structural cost reductions, supported solid earnings numbers for the first half of 2021. The company also offered a positive outlook, with expectations that traffic volumes will reach 50% of 2019 levels by the end of 2021; and an undertaking to reinstate its 40% dividend payout ratio as soon as possible, with the potential to pay a special dividend.
The worst performing stock in the portfolio was Arizona-based regulated utility Pinnacle West (-8%). In contrast to the healthy gains achieved by most of the portfolio’s utility holdings this month, its share price fell after draft terms for its next regulatory period were less favourable than had previously been expected. Pembina Pipeline (-6%), which owns and operates a strategically located and well-integrated set of energy storage and transportation assets in Western Canada, also lagged as investors took profits following substantial gains in recent months.
The portfolio’s toll road operators delivered mixed returns. Italy’s Atlantia (+4%) received formal approval from the Italian government to sell ASPI, its Italian motorway unit; while first-half earnings from French peer Vinci (+2%) were positive, with low volumes for its airport assets offset by strong toll road volumes. However Brazil’s CCR (-6%) underperformed as reasonable June quarter earnings were overshadowed by political instability and a growing expectation that the country’s central bank may have to raise interest rates by more than previously expected. China’s Jiangsu Expressway (-3%) also gave up ground, as steady traffic growth during the June quarter was overshadowed by fresh movement restrictions in July and August, aimed at curbing the spread of coronavirus within the country.
Performance is based on First Sentier Global Listed Infrastructure Fund Class I (USD – H Dist). This is the semi-annually dividend distribution class of the Fund. The performance quoted are based on USD total return (with dividend reinvested). Dividends are not guaranteed and may be paid out of capital.
* The benchmark displayed is UBS Global Infrastructure & Utilities 50-50 Index until 31 March 2015 and FTSE Global Core Infrastructure 50/50 Index from 1 April 2015 onwards. Gross of tax benchmark performance is shown before 1 July 2016 and net of tax benchmark performance is shown after the aforementioned date.
1 Source: First Sentier Investors & Bloomberg, the First Sentier Global Listed Infrastructure’s cumulative return over one month, data as of 31 August 2021.
2 Source: Lipper & First Sentier Investors, Nav-Nav (USD total return) as at 31 August 2021. Allocation percentage is rounded to the nearest one decimal place and the total allocation percentage may not add up to 100%. Fund inception date: 27 June 2008.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
This Fund is a sub fund of Ireland domiciled First Sentier Investors Global Umbrella Fund Plc.
Fund activity
The Fund initiated a position in US electric utility Entergy. This stock has significantly lagged peers over the past six months, creating an attractive entry point. We believe this company will deliver annual Earnings Per Share growth of between 5% and 7% over the next few years, from increased load growth, improving operational efficiencies and a robust capital expenditure program with upside from increased renewable energy deployment.
The Fund sold its holding in US water utility Essential Utilities after share price gains moved the stock to a lower position within our investment process. French construction and concession group Eiffage was also divested from the portfolio following steady share price improvements in recent months, and on concerns that the rise of Delta variant coronavirus cases may slow the French path to recovery.
Market outlook and fund positioning
The Fund invests in a range of global listed infrastructure assets including toll roads, airports, railroads, utilities, pipelines, and wireless towers. These sectors share common characteristics, like barriers to entry and pricing power, which can provide investors with inflation-protected income and strong capital growth over the medium-term.
The outlook for the asset class is positive. Government attempts to bolster economic fundamentals through infrastructure and green energy stimulus plans are likely to benefit many global listed infrastructure firms. In particular, the ongoing repair and replacement of old energy transmission and distribution grids, along with the accelerating build-out of renewables, should represent a steady source of utility earnings growth over many years. Recent extreme weather conditions in the US — wetter and windier conditions than normal in the eastern half of the country; droughts and wildfires in the west — have highlighted the pressing need to improve the resilience of that country’s infrastructure networks.
There remains scope for a material recovery in traffic / passenger volumes across transport infrastructure sectors such as toll roads, airports and passenger rail, as vaccine programs ramp up globally. Reflecting this, toll roads represent the portfolio’s largest sector overweight. Traffic volumes have proved more resilient than those of other transport infrastructure assets; and toll roads are likely to be the first to see a return to normal demand levels. The stop-start nature of the recovery across different regions and industries, along with strong post-pandemic demand, is presenting a challenge to global supply chain networks. During the month, the number of container ships waiting to unload their cargos onto trucks and freight rail trains at California’s two largest ports rose to 44, compared to a typical number of either zero or one.
We are also cognizant of potential shifts in the political landscape, with upcoming elections in California, Canada, Germany and Japan (to be followed by France and Brazil next year). Analysis of political and regulatory risk represents a core part of our due diligence. We seek to assess, manage and balance potential risks of this nature by having a deep understanding of the regulatory frameworks in each market, and how those may change with elections; and by meeting with regulators in the various jurisdictions we own assets in.
Source : Company data, First Sentier Investors, as 31 August 2021.
Important Information
Investment involves risks, past performance is not a guide to future performance. Refer to the offering documents of the respective funds for details, including risk factors. The information contained within this document has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy or completeness of the information. Neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this. It does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. The information in this document may not be edited and/or reproduced in whole or in part without the prior consent of FSI.
This document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong. First Sentier Investors is a business name of First Sentier Investors (Hong Kong) Limited.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.
First Sentier Investors (Hong Kong) Limited is part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.
MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
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