Specialist in Asia Pacific, 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 July 2024
Global Listed Infrastructure rose strongly in July, reflecting a rotation away from higher beta market sectors including technology, in favour of more defensive assets. The FTSE Global Core Infrastructure 50/50 index returned +6.4% while the MSCI World index^ ended the month +1.8% higher.
The best performing infrastructure sector was Towers / Data Centres (+12%), supported by healthy earnings numbers and easing interest rates. The US 10-year Treasury yield fell from 4.4% to 4.0% during the month. A positive update from telecommunications / networking company Ericsson (+11%, not in our Focus List), which reported improving demand for its network equipment in North America, also buoyed sentiment towards Towers.
The worst performing infrastructure sector was Airports (flat). Several airlines indicated that demand for air travel may now be softening, following the post-Covid phenomenon of “revenge travel”. Spain’s largest airport operator AENA (-7%, not held) fell on concerns that Barcelona Airport, a key asset, may be separated from the company as moves to provide greater autonomy to the Catalonian region progressed.
The best performing infrastructure region was the UK (+10%). The country’s water and electric utilities gained against a backdrop of greater political certainty, following a convincing victory for the Labour Party in the country’s general election. Ofwat, the water regulator for England and Wales, released Draft Determinations setting out its provisional assessment of allowed revenues and performance targets for water utilities between 2025 and 2030. Listed water utilities including Pennon (+13%, not held), Severn Trent (+8%, held) and United Utilities (+5%, not held) increased as investors welcomed the proposals.
The worst performing infrastructure region was Japan (-3%) as the country’s electric utilities (not in our Focus List) gave up ground following gains earlier in the year.
^ MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 31 July 2024. Source: First Sentier Investors / Lipper IM. All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Fund performance
The Fund returned +6.2% after fees in July, 25bps behind the FTSE Global Core Infrastructure 50/50 Index (USD, Net TR).
The best performing stock in the portfolio was US freight rail operator Norfolk Southern (+16%), which announced better-than-expected June quarter earnings, aided by disciplined cost control. Investors welcomed better service metrics such as train speed and dwell time (the time spent at a scheduled stop without moving). These developments indicate that the company is working to address recent criticisms made by activist investor Ancora Holdings, highlighting that Norfolk Southern lagged peers on a range of operational efficiency metrics. West coast peer Union Pacific (+9%) also increased as the company’s Operating Ratio, a key measure of operational efficiency, reached its best level since 2022. The company’s June quarter earnings were in line with market expectations.
Regulated US utilities represented another area of strength for the portfolio. Eversource Energy (+14%), which serves 4.4 million customers in Connecticut, Massachusetts and New Hampshire, was supported by attractive valuation multiples; indications of an improving regulatory environment for its Connecticut operations; and the prospect of further interest rate declines. Several peers were supported by evidence of rising demand for electricity. On its June quarter earnings call, American Electric Power (+12%) noted that demand for electricity within its Commercial segment increased by 12% compared to the same period a year earlier, driven primarily by robust demand from data centre customers. Peers including Alliant Energy (+10%), Evergy (+9%) and Xcel Energy (+9%) also gained on optimism around this long term, structural theme. NextEra Energy (+8%), whose businesses include regulated Florida utilities as well as renewables developer NextEra Energy Resources, reported strong growth in its pipeline of future renewables projects. The company announced 3 GW (gigawatts) of additional wind / solar / storage projects for the June quarter – substantially higher than its typical quarterly increase of 2 GW.
US mobile tower operators gained as bond yields eased. American Tower (+13%) announced US$2.9 billion revenue for the June quarter, 4.6% better than the same period a year earlier and slightly ahead of market consensus. The company largely reiterated its organic revenue growth forecasts and noted that its data centre operations were seeing robust demand. Quarterly earnings for peer Crown Castle (+13%) were in line with expectations; and the company confirmed its 2024 earnings guidance. A strategic review of the company’s fibre-cable business remains in progress.
The worst-performing stock in the portfolio was Chinese gas utility ENN Energy (-15%), as concerns re-emerged that the sluggish pace of Chinese economic growth would affect customer demand for natural gas. Similar worries weighed on the share price of Chinese water utility Guangdong Investment (-10%), which manages property, toll road and electricity generation assets alongside its core business of supplying water to Hong Kong.
The portfolio’s airport holdings also underperformed during an otherwise strong month for the asset class. Japan Airport Terminal (flat) and Beijing Airport (flat) delivered neutral returns for the month in the absence of material stock-specific news. Mexican operator ASUR (+2%) announced robust June quarter earnings, aided by positive trends in its commercial segment (i.e. car rental and parking), but saw relatively modest gains. Swiss peer Flughafen Zurich (+2%) also edged higher, building on pleasing share price gains since the start of the calendar year.
Fund activity
Early in the month, a position in Chinese toll road operator Jiangsu Expressway was divested after a period of strong share price performance relative to other global toll road operators reduced mispricing and moved the stock lower within our investment process.
Market outlook and fund positioning
The Fund invests in a range of listed infrastructure assets including toll roads, airports, railroads, utilities and renewables, energy midstream, wireless towers and data centres. 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.
Since early 2022, with rising interest rates a key concern for investors, global listed infrastructure has underperformed broader equity markets and delivered roughly flat returns. A backdrop of “risk-on” sentiment has seen higher growth areas of the market, particularly technology, outshine lower beta assets. Political uncertainty - always a key risk for infrastructure investors - has also been front of mind, with a large proportion of the world’s population eligible to vote in an election during 2024.
However, the headwinds that have faced global listed infrastructure over this period may now be about to turn into tailwinds. In recent weeks central banks in Canada and the UK have cut interest rates, and bond yields have fallen sharply. Concerns that the global economy may be starting to slow appears to be drawing investors back towards more defensive assets, including global listed infrastructure. Political uncertainty has reduced following significant recent elections in India, Mexico, France and the UK, albeit with the US presidential election still to come.
Listed infrastructure’s regulated or contracted earnings should prove supportive in the event of a deteriorating economic environment. We also remain optimistic about the structural growth themes that the asset class is positioned to benefit from, including the energy transition (utilities), digital connectivity (towers), growth in AI (data centers) and rising demand for electricity (utilities, energy midstream).
Source : Company data, First Sentier Investors, as of 31 July 2024.
These figures refer to the past. Past performance is not a reliable indicator of future results. For investors based in countries with currencies other than the base currency of the share class, the return may increase or decrease as a result of currency fluctuations. Performance data calculated since the launch date. Performance data is calculated on a net basis by deducting fees incurred at fund level (e.g. the management and administration fee) and other costs charged to the fund (e.g. transaction and custody costs), save that it does not take account of initial charges or switching fees (if any). Income reinvested is included on a net of tax basis. First Sentier Global Listed Infrastructure Fund, Class I (Distributing) USD shares. Benchmark is the FTSE Global Core Infra 50/50 TR Index from 1 April 2015, prev. UBS Global Infra & Utilities 50/50 TR Index.
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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 material 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. To the extent permitted by law, 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 material may not be edited and/or reproduced in whole or in part without the prior consent of FSI.
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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 FSI’s portfolios at a certain point in time, and the holdings may change over time.
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To the extent permitted by law, MUFG and its subsidiaries are not responsible for any statement or information contained in this material. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this material 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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