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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A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at September 2021
Global Listed Infrastructure dipped in September as higher energy prices, US political uncertainty and China’s Evergrande debt crisis weighed on financial markets. The best performing infrastructure sector was Airports (+6%), on US plans to ease pandemic-related restrictions in November for air travellers from 33 countries including China, India, Brazil and most of Europe. Pipelines (+5%) gained on the view that strong energy prices would prove supportive of the growth outlook for these companies.
The worst performing infrastructure sector was Towers / Data Centres (-9%) which were affected by rising bond yields, and as investors took profits following several months of strong performance. Utilities (-4% to -6%) underperformed owing to higher bond yields; a spike in natural gas prices which triggered concerns for rising input costs; and the threat of political interference in European power markets.
The best performing infrastructure region was Japan (+4%), where a coronavirus state of emergency was lifted at the end of the month. The worst performing infrastructure region was the United States (-6%) as its politicians debated raising the country’s debt ceiling, and continued to negotiate President Biden’s infrastructure stimulus initiatives.
Fund performance
The Fund returned -2.8% after fees in September1 , 9 basis points behind the FTSE Global Core Infrastructure 50/50 TR Index (SGD).
The best performing stock in the portfolio was US Liquefied Natural Gas (LNG) producer and exporter Cheniere (+12%). The company, which owns and operates substantial LNG liquefaction facilities in Southwest Louisiana and South Texas, announced a US$10 billion capital allocation plan. Key points included initiating a quarterly dividend payment, resuming its share buyback program, reducing debt, and investing in further organic growth opportunities. High global demand for natural gas also buoyed sentiment towards the stock.
Pembina Pipeline (+5%), which operates a well-integrated portfolio of energy transportation and storage assets in Western Canada, made up ground after August’s share price declines. In contrast, Enterprise Products Partners (-3%) lagged peers. The company owns extensive US energy pipeline networks, storage capacity and export facilities and trades on attractive valuation multiples, but investors remained underwhelmed by the absence of additional capital management initiatives.
The portfolio’s airport holdings performed well. Spanish-listed AENA (+10%), the world’s leading airport operator by number of passengers, and Flughafen Zurich (+10%), which owns and operates Switzerland’s largest airport, were both supported by the prospect of traffic recovery over coming months. Passenger volumes for Mexican peer ASUR (+9%) have already returned to pre-pandemic levels. Cancun International Airport, the company’s largest asset, could see further growth as it continues to benefit from pent-up demand for leisure travel from the US and Canada.
The portfolio’s US electric utility holdings were affected by concerns that higher input costs would put upward pressure on customer bills, potentially leading to downward pressure on future rate base growth. The worst performing stock in the portfolio was US electric utility Entergy (-10%), as slow progress in restoring power to its Louisiana-centric service territory following damage from August’s Hurricane Ida weighed on sentiment towards the stock. Other large-cap US electric utilities including Eversource Energy (-9%) and Xcel Energy (-8%) also underperformed in this environment.
US tower operators American Tower (-9%) and SBA Communication (-8%) declined after a sustained period of outperformance. This appears to reflect a general rotation towards sectors with more exposure to post-pandemic reopening, rather than stock-specific factors. CyrusOne (+1%), which owns strategically located data centres in the US and is building a presence in key European markets, ticked higher on rumours that it was exploring strategic alternatives, including a potential sale of the company.
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 2021. 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.
* 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.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Fund activity
The Fund initiated a position in Iberdrola, a large cap, Spanish-listed electric utility with extensive regulated network assets in Spain and Portugal, the US, the UK, and Latin America. The company is also the second largest owner of renewable generation assets globally [after US peer and fellow portfolio holding NextEra Energy]. Political interference in the Spanish electricity market (a proposed claw back of generation profits) as energy prices increased saw Iberdrola sell off sharply in September, creating an attractive entry point.
Passenger rail operator West Japan Railway, whose network service area includes the Kansai region, the cultural centre of Japan, was also added to the Fund. The country’s recently-lifted state of emergency had reduced domestic travel volumes and weighed on the passenger rail sector. As the country’s large-scale vaccine rollout continues, West Japan Railway should be among the companies that benefit most from the country’s gradual reopening and return to economic normality.
The Fund divested its holding in Magellan Midstream Partners, which owns and operates refined product (gasoline and diesel) and crude oil pipeline networks in the US Midwest. The stock was sold after the prospect of a US economic recovery drove strong share price gains; and on concerns for its longer term growth prospects as the global energy transition drives a shift in demand from conventional to electric vehicles.
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.
Toll roads represent the portfolio’s largest sector overweight, via positions in European, Asia Pacific and Latin American operators. We believe these companies represent exceptional value at current levels, with traffic volumes proving significantly more resilient than those of other transport infrastructure assets. While new coronavirus variants have clouded the near term outlook, we remain confident that toll roads will lead a return to normal demand levels as economic activity levels pick up.
The portfolio is overweight Gas Utilities, which we believe have an important role to play in the years ahead as economies transition to lower carbon energy sources. The portfolio’s holdings in this sector consist of a Chinese operator benefitting from central government support for the country’s transition away from coal; a defensive Japanese gas utility trading at deep value, and specialist US and European names operating from strong strategic positions within niche markets.
The portfolio is underweight Electric / Multi-Utilities. While these companies represent a large segment of the global listed infrastructure universe, and are a good source of yield and defence, some are trading at levels where limited mispricing is evident. That said, a substantial portion of the portfolio still consists of high conviction utility holdings. The portfolio’s focus is on companies with the scope to derive steady, low risk earnings growth from rate base investment (replacing ageing distribution networks, upgrading substations, expanding transmission lines); and the replacement of older coal-fired power stations with wind farms and solar power.
The portfolio is also underweight the Airports sector. It remains to be seen how quickly consumer behaviour will return to normal, while business travel may never regain previous levels. The portfolio’s exposure is focused primarily on higher quality European operators such as Spain’s AENA whose passenger mix is tilted towards Leisure and VFR (visiting friends and relatives) travellers. These categories could see numbers rebound sharply as travel restrictions are lifted.
Source : Company data, First Sentier Investors, as of 30 September 2021.
Important Information
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