A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at September 2020
Global Listed Infrastructure held up in September as global equities’ recent momentum faltered. The best performing infrastructure sectors included Multi-Utilities (+2%) and Electric Utilities (+1%) as investors rotated towards stable, lower beta assets. Toll Roads (+2%) also gained, helped by improving traffic volumes for Asia-Pacific operators.
The worst performing infrastructure sector was Pipelines (-7%), which lagged on a growing awareness of the longer term structural challenges facing fossil fuel demand (decarbonisation and renewables growth, electric vehicles rollout, potential competition from hydrogen). During the month, California’s Governor signed an order that would prohibit the sale of diesel and petrol passenger cars in the state by 2035; and China committed to a 2060 net zero carbon emissions target.
The best performing infrastructure regions were the United Kingdom (+4%), where utilities were buoyed by the prospect of more favourable regulatory outcomes than previously anticipated; and Australia / New Zealand (+4%), whose roads and airports gained on an improving coronavirus situation. The worst performing infrastructure region was Latin America (-4%), reflecting underperformance from Brazil’s broader market.
The Fund returned -1.8% after fees in September 1 , 109 basis points behind the FTSE Global Core Infrastructure 50/50 TR Index (SGD).
The best performing stock in the portfolio was Auckland International Airport (+10%), which climbed steadily as domestic airline services resumed, and a trans-Tasman travel bubble between Australia and New Zealand appeared increasingly likely. ASUR (+4%), whose assets include Cancún International Airport (Mexico’s second busiest), was supported by a continued improvement in passenger numbers. However, Spain’s AENA (-5%) and Flughafen Zurich (-7%) gave up some of the previous month’s gains as European coronavirus case numbers increased.
Toll road operators also delivered mixed returns. Transurban (+5%) gained on the view that Melbourne (whose road networks account for around a third of the company’s earnings) may be able to ease its coronavirus restrictions sooner than expected. Investors were drawn to the secure 6% dividend yield offered by Jiangsu Expressway (+1%), whose toll road revenues have now largely recovered to pre-coronavirus levels. Despite road traffic being relatively more resilient than other transport modes during the pandemic, Eiffage (-10%) and Vinci (-9%) underperformed due to a spike in coronavirus case numbers in Europe.
Demand for defensive, income-generative assets helped UK multi-utility National Grid (+6%) and water utility Severn Trent (+5%) to outperform. UK utilities were further buoyed by news that the Competition and Markets Authority had determined that the allowed returns of four unlisted water companies were too low. Although unlikely to affect Severn Trent, the decision bodes well for upcoming regulatory decisions for National Grid, and for peer SSE (-4%) which rallied after the end of the month.
Mobile tower stocks SBA Communications (+4%) and Crown Castle (+3%) performed relatively well as investors anticipated robust September quarter earnings. American Tower (-3%) lagged in comparison, despite announcing a new 15 year agreement with T-Mobile, one of its main customers. The move should provide visibility over leasing revenue growth, and reinforces the essential nature of mobile towers over the long term.
The worst performing stocks in the portfolio included energy infrastructure names Cheniere (-11%), Enterprise Products Partners (-10%) and Magellan Midstream Partners (-10%). In the absence of material stock-specific news, these moves appear to reflect investor concerns about the structural headwinds facing the sector (noted earlier). Gas utility Rubis (-13%), which owns and operates a range of specialist energy storage and distribution assets, was affected by similar concerns. We believe that contracted and regulated business models, and the still-vital nature of the services provided by these companies’ unique or hard-to-replicate assets, will remain supportive of earnings and valuations.
US Pacific Northwest utilities represented another area of weakness in the portfolio. Multi-utility Avista (-7%) and electric utility Portland General Electric (-6%) fell sharply after wildfires broke out in their respective Washington and Oregon service territories, before recovering some ground as it became clear that high winds rather than utility equipment or maintenance activities had caused the fires. Unlike California, these states’ regulatory frameworks allow utilities to recover wildfire-related costs unless found negligent.
Annualised performance in SGD (%)2
Cumulative performance in SGD (%)2
Asset allocation (%) 2
Top 10 holdings (%) 2
1 First Sentier Global Listed Infrastructure Fund’s cumulative return over one month. The performance of the fund is based on the Singapore unit trust, net of fees, expressed in SGD terms.
2 Source: Lipper & First Sentier Investors. Single pricing basis with net income reinvested. Data as at 30 September 2020. Allocation percentage is rounded to the nearest one decimal place and the total allocation percentage may not add up to 100%. First Sentier Global Listed Infrastructure Fund inception date: 3 March 2008.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
* From inception - 31 May 08 : S&P Global Infrastructure Index; From 1 Jun 08 – 31 Mar 15 : UBS Global Infrastructure and Utilities 50-50 Index; From 1 Apr 15 : FTSE Global Core Infrastructure 50/50 Index.
Italian-listed tower operator INWIT was added to the Fund. INWIT was established in 2015 when Telecom Italia, Italy’s incumbent telecom company, spun off its high quality tower portfolio as a stand-alone business. In March 2020 it merged with Vodafone’s Italian tower portfolio, creating Europe’s second largest listed tower company with over 22,000 towers. The company is now positioned to benefit from mobile towers’ long term structural growth tailwinds, as Telecom Italia and Vodafone build out 5G and small cell networks in Italy.
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 portfolio remains positioned with toll roads as its largest sector overweight. Valuation multiples still imply multi-year traffic declines, in contrast to the improvements that toll road companies referenced in recent quarterly earnings updates. While increased flexibility to work-from-home may result in adjustments to traffic, we see clear evidence that people prefer to travel by private car than by public transport in order to maintain social distancing.
The portfolio’s overweight exposure to gas utilities consists of specialist North American and European companies operating in niche market areas; a Japanese operator with a strong balance sheet trading at undemanding valuation multiples; and Chinese gas utilities which are positioned to benefit from a structural shift from coal to cleaner energy sources, in a region that has so far coped well with the coronavirus outbreak.
The Fund now has a roughly neutral exposure to Multi/Electric utilities, where steady share price gains have reduced some of the mispricing previously seen in this sector. Utilities still represent a substantial part of the portfolio in absolute terms. Regulated utility earnings should be materially more resilient than those of the broader market in the event of an extended economic slowdown or recession; and low interest rates will be supportive of valuation multiples.
We remain cautious on the Airports sector. A sustained recovery in airline passenger numbers appears a remote prospect for many airports, given traveller wariness and persistently high coronavirus case numbers. A staggered re-opening of airports appears likely to start with domestic or regional flights, which are less valuable than international flights. The silver lining is that many airports’ regulated assets are now under-earning their allowed returns, giving scope for future regulatory terms to be more generous than previously expected.
Source : Company data, First Sentier Investors, as of end of September 2020
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