Our global listed infrastructure strategies outperformed global equities for the month.
The outlook for interest rates and inflation continue to cause volatility in markets following the conflict between Ukraine and Russia. We expect this volatility to continue as the market digests the impact on inflation and global growth.
Geopolitical risks, ongoing COVID-19 disruption, supply chain issues and high inflation continue to reduce expectations for economic growth, although a recession is still not considered the base case.
On a regional basis, the U.S. and Canada region was the top contributor to monthly performance (+4.59%), of which U.S. renewables utility Brookfield Renewables Partners (+0.56%), U.S. electric utility Constellation Energy (+0.56%) and Canadian energy infrastructure company Pembina Pipeline (+0.45%) were the lead performers.
Brookfield Renewables Partners is a pure-play renewables operator and developer headquartered in Canada, focused on international hydro, solar, wind and storage technology. As more private and public institutions announce ambitious carbon reduction initiatives, Brookfield Renewable’s globally diversified, multi-technology renewables business makes Brookfield an attractive partner. Brookfield’s development pipeline stands at 18,000 MWs, providing confidence the company can meet its targeted double-digit cashflow growth through to 2025. The market narrative around the energy transition and energy security, along with the price of fossil fuels increasing which has driven greater focus on switching to renewables, helped Brookfield shares during the month.
Constellation Energy is primarily a nuclear generation company, and is the largest producer of carbon-free electricity in the U.S. During the month, Constellation benefit from the rising gas prices, which in turn drove higher power prices.
Pembina Pipeline provides transportation and midstream services for the energy industry in North America. The company announced the hire of Scott Burrows as permanent CEO, and Jaret Sprott as COO and reaffirmed its corporate strategy, boosting investor sentiment.
Turning to Western Europe, French rail operator Getlink (+0.37%) also performed well during the month.
Getlink is a French rail company that owns the concession over the Channel Tunnel rail link between the U.K. and France. Traffic recovery continues with the easing of pandemic related restrictions. Separately, Getlink’s electric transmission interconnector project, ‘Eleclink’, received final safety certification from the regulator, enabling operations to start in the middle of 2022.
Spanish electric utility Iberdrola (-0.15%) was the largest detractor from monthly performance.
Iberdrola is a multinational integrated electric utility company headquartered in Spain. Iberdrola is engaged in energy networks, renewables and wholesale and retail operations. The company has expanded internationally with operations in the U.K. (via Scottish Power), the U.S. (via Avangrid), Brazil (via Neoenergia) and Mexico. The share price of Iberdrola fell with the energy price surge in Europe as a result of the Russia-Ukraine conflict. Additionally, this caused renewed concerns around the profit clawback from electricity generators by the Spanish government.
All returns are in local currency.
On a regional level, the strategy’s largest exposure is in the U.S. and Canada (47%) and consists of exposure to regulated and contracted utilities (35%) and economically sensitive user pays infrastructure (12%).
For the ClearBridge Developed Markets Infrastructure Income Strategy, the primary quantitative tool in portfolio construction is excess return, on which our stock-ranking system is based. The ClearBridge Developed Markets Infrastructure Income Strategy also uses yield quality as a secondary measure. As such, driven by valuation, the Investment Committee used the opportunity to crystallise some gains by exiting Canadian infrastructure company Brookfield Infrastructure Partners.
This month we review U.S. electric utility Public Service Enterprise Group.
Public Services Enterprise Group (PEG) operates the largest utility business (~90% of earnings) in New Jersey, along with a generation business (~10% of earnings) comprising nuclear and gas turbine facilities.
PEG’s revenues are regulated by the state utility commissions where it operates (such as the New Jersey Board of Public Utilities) and its electric transmission assets are regulated by the Federal Energy Regulatory Commission (FERC).
We believe that in owning PEG, we own a premium utility business and receive a stable generation business (declining contribution to earnings). With a high-quality, long-tenured management team, PEG has delivered a 11% regulated asset base CAGR since 2009, with the utility business consistently ranking in the top quartile in several performance measures.
In our latest Valuations update, Portfolio Manager Nick Langley discusses how the macro environment is impacting the listed infrastructure asset class and highlights the valuations of different regions and sectors.Read full article