On 22 January 2021, RARE Infrastructure Limited changed its name to ClearBridge Investments Limited.

Portfolio Insights

Income Strategy May Commentary

Overview

Our global listed infrastructure strategy performed within the range of infrastructure indices, which marginally underperformed equities for the month.

Economic activity continued to rebound strongly during the month with ongoing and significant upgrades to consensus earnings and economic growth forecasts.

COVID-19 vaccine rollouts gained pace in many regions, although mobility restrictions remained significant and even increased in many regions as a third wave of infections continued at elevated levels. U.S. mobility restrictions proved the exception, easing as vaccine penetration increased.

Government policy remained supportive, with continued implementation of previously announced stimulus. Bond rates stabilised, with real bonds declining and the continued view that the inflation spike is largely transitory, albeit risk is to the upside. Strong labour and wage data, combined with large increases in commodity prices, highlight the risk of higher inflation; however, significant slack in labour markets is expected to contain inflation risk. Markets performed solidly on the back of the strong economic data.

Portfolio Performance

On a regional basis, Western Europe was the top contributor to monthly performance (+0.91%), of which U.K. electric utility SSE (+0.24%) and Spanish gas utility Enagas (+0.15%) were the lead performers.

SSE is a diversified energy utility headquartered in Scotland. It is vertically integrated, operating over the entire supply chain in the U.K., with generation (including hydro, wind, CCGT and coal-fired), electricity and gas networks, and retail businesses. It is the U.K.’s largest renewable energy generator. Shares performed in line with the U.K. utility sector, which did well along with rising inflation. The company also announced a solid set of FY21 results, meeting market expectations.

Enagas engages mainly in the transport, storage and regasification of natural gas in Spain. It is a natural monopoly in transport and has the largest share of regasification in Spain. Shares rose after the company announced its 1Q result in late April, which shows its associate Tallgrass starting to pay dividends and having a reassuring FY21 guidance benefiting from weather conditions.

Elsewhere in the region, Spanish electric utility Red Electrica (+0.15%) also performed strongly.

Red Electrica is engaged in the supply and transmission of electricity and is the sole high-voltage transmission agent and system operator in Spain. Shares did well along with Spanish bond yields coming down from the recent high.

Turning to Latin America, Brazilian toll road operator CCR also performed well, contributing +0.13% to monthly performance.

CCR is Brazil’s largest public infrastructure concession holder, operating concessions across motorways, urban mobility (sea ferries, subways, light rail) and airports. CCR performed well during the month of May following a string of successful new auction wins across the airport, toll-road and urban mobility sectors.

Chilean water company Aguas Andinas (-0.42%) was the largest detractor from monthly performance.

Aguas Andinas supplies drinking water and provides sewerage and treatment services to residential, commercial and industrial customers in Chile. Aguas was weak during the month of May as negative results coming out of the constitutional convention vote signalled significant weakness for the country's current conservative regime. Going forward, the results of the vote highlighted the potential for additional political turbulence in the leadup to the presidential elections.

All returns are in local currency.

Positioning and Outlook

On a regional level, the Strategy’s largest exposure is in the U.S. & Canada (37%) and consists of exposure to regulated and contracted utilities (28%) and economically sensitive user pays infrastructure (9%).

For the Global Infrastructure Income Strategy, the primary quantitative tool in portfolio construction is Excess Return, on which our stock-ranking system is based. The Global Infrastructure Income Strategy also uses Yield Quality as a secondary measure.

Monthly Stock Highlight

This month we review U.K. electric utility National Grid (NG).

National Grid is one of the world’s largest publicly owned utilities, focused on transmission and distribution activities in electricity and gas. It owns and operates regulated electricity and gas network assets in both the U.K. and the U.S., which contribute about 95% of its earnings and equity value.

National Grid is a high-quality, low-risk, regulated business with regulatory certainty to 2021. The U.K. regulator, Ofgem, has a long history of incentive-based regulation resulting in predictable, stable, inflation-linked cash flows. National Grid’s U.S. business operates in stable regulatory environments and has meaningfully improved returns following years of underperformance, with achieved returns now at 95% of allowed returns.

National Grid has significantly reduced U.K. exposure following the sale of its U.K. gas distribution, increasing the proportion of value from the higher-growth U.S. business to ~50%. National Grid has strong medium-term regulated asset base (RAB) growth of ~7% pa, driven predominantly by U.S. RAB growth of ~10% pa. The U.K. business has performed strongly in recent years, outperforming regulatory allowances. Whilst we expect the upcoming regulatory reset to be tougher than the current allowances, we believe the implied U.K. business value is overly discounted, providing an attractive investment opportunity.

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Our global listed infrastructure strategy performed within the range of infrastructure indices, which marginally underperformed equities for the month.

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