Global Infrastructure Value Strategy Commentary August

Key Takeaways

• Infrastructure delivered positive returns in August, slightly trailing global equities on a U.S. dollar basis in a month of gains across most equity indexes.

• Passenger traffic lifted airports, gas utilities benefited from strong fundamentals, while higher bond yields and some idiosyncratic drivers weighed on renewables and communications towers.

• We remain somewhat defensively positioned with an emphasis on utilities, which have very strong growth profiles, particularly in the U.S., driven by AI data centre power demand, industry decarbonisation and resiliency spending (with recent quarterly reports continuing to affirm this).

Market Overview

Infrastructure delivered positive returns for the month, slightly trailing global equities on a U.S. dollar basis in a month of gains across most equity indexes.

GDP-sensitive infrastructure performed well, with European and Mexican airports leading the infrastructure sectors in our coverage universe, helped by continued passenger growth during the summer season. Strong fundamentals were beneficial for gas utilities, in particular in Canada, where companies reported high utilisation of pipeline assets, as well as continued momentum in project origination in the second quarter, driven by strong demand from customers for additional capacity.

Renewables and communication towers were the laggards for the month. Renewables sentiment was weighed down by the U.S. government’s proposed phase down of wind and solar tax credits, and orders to halt select offshore wind projects. Communication towers continue to face elevated customer churn over the next few years as a result of recent carrier consolidations, including the Sprint/T-Mobile and AT&T/EchoStar deals.

On a regional level, Latin America was the lead performer, with one of its electric utilities making strong gains as a legal settlement with the Brazilian government was seen as a derisking event and the company showed strong operational performance.

Looking ahead, we continue to see opportunities driven by decarbonisation, for example electric utilities in the U.S., the U.K. and Europe, and the buildout of renewables, poles and wires to be able to move energy around the grid.

U.S. and European electric and water utilities are also investing in their networks to improve the resiliency of the grid to adapt to or mitigate the effects of climate change. AI and data centres are also requiring a significant buildout of energy infrastructure, in particular for U.S. electric and gas utilities, as we saw reflected in some of the leading performers this month.

Portfolio Highlights

Our global listed infrastructure strategies underperformed global equities as well as relevant infrastructure benchmarks for the month.

On a sector-specific basis, airports (+0.62%) were the top contributors for the month, with German operator Fraport (+0.32%) the lead performer. Fraport owns and operates one of Europe’s leading hub airports at Frankfurt, one of the world’s largest by passenger and cargo volumes. Fraport also owns and operates other airports around the world, including in Greece, Brazil and Peru. Frankfurt Airport operates within a dual till regulatory regime. The market is anticipating the phase down of Fraport’s elevated investment cycle as they approach the end of their construction of Frankfurt Terminal 3 in the coming months. This will put the company in a free-cash-flow-positive position and allow it to reinstate the dividend and de-lever the balance sheet in the years to come. Importantly, Terminal 3 is a big upgrade to the soon-to-be replaced Terminal 2, with higher capacity for international route expansion, significantly improved retail offering and more efficient check-ins.

Turning to North America, Canadian gas utility TC Energy (+0.30%) also performed well.

TC Energy (TC) is a North American company managing over 93,300 km of natural gas pipelines and 4.3 GW of power assets. Nearly 100% of TC’s cash flows are backed by stable long-term contracts and cost-of-service tolling with creditworthy counterparties. TC reported strong second quarter earnings results, with high asset utilisation, and strong momentum on project origination.

U.S. rail operator CSX (-0.31%) and U.K. electric utility SSE (-0.32%) and were the largest detractors.

CSX operates the second-largest listed U.S.-centric railroad in terms of market cap operating in the East Coast. The company owns over 20,000 miles of track and operates across 23 states. CSX’s share price moved down with the collapse of takeover/merger speculation.

SSE is a diversified energy utility headquartered in Scotland, U.K. It is vertically integrated, operating over the entire supply chain in the U.K., with generation (including hydro, wind, CCGT), electricity networks, and retail businesses (primarily B2B). It is the U.K.’s largest renewable energy generator. SSE’s share price was impacted by a higher rate environment across the U.K.

During the month we initiated a position in Spanish electric utility Iberdrola, taking advantage of weakness in the sector during the quarter to enter into a high-quality large cap electric utility with regulated operations across Spain, U.K., U.S. and Latin America, as well as a +40GW renewables portfolio globally. We also exited our position in Canadian energy infrastructure company Pembina Pipeline to use as a funding source.

All returns are in local currency.

Positioning and Outlook

While the current environment is marked by heightened volatility and uncertainty, we remain confident in our utility and infrastructure assets and their ability to generate defensive, consistent and growing cash flow streams for shareholders over the medium to long term. Another key benefit of infrastructure investing is the pass-through of inflation – approximately 90% of our portfolio continues to benefit from direct or indirect inflation pass-through mechanisms.

Currently, we remain somewhat defensively positioned with an emphasis on utilities. We continue to find the sector undervalued, as peak bond yields have resulted in multiples coming down in that space. Nevertheless, the utilities themselves have very strong growth profiles, particularly in the U.S., driven by AI data centre power demand, industry decarbonisation and resiliency spending (with recent quarterly reports continuing to affirm this). At the same time, European utilities are getting more capex approved by regulators and are seeing returns tick up as well, providing robust long-term visibility in earnings growth. With its defensive characteristics, we believe infrastructure is well-positioned to offer protection in slowing economic and uncertain market environments.