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Value Strategy July Commentary

Overview

Our global listed infrastructure strategies outperformed infrastructure benchmarks and underperformed global equities for the month.

The outlook for interest rates and inflation continues to cause volatility in markets as investors digest expectations of a global slowdown in growth in conjunction with central bank tightening, with the expectation that inflation and central bank hawkishness is close to its peak.

Inflation remains a large risk to economic growth as increasing energy prices and a higher cost of living pressure the average consumer. The probability of a recession continues to increase, as consensus expectations move closer to a recession as a base case.

Portfolio Performance

On a regional basis, the U.S. and Canada was the top contributor to monthly performance (+4.09%), of which U.S. electric utility NextEra Energy (+0.49%) and U.S. energy infrastructure company Cheniere Energy (+0.47%) were the lead performers.

NextEra is an integrated utility business with a regulated utility operating in Florida and the largest wind business in the U.S. NextEra’s regulated business includes Florida Power & Light, which serves nine million people in the State of Florida. NextEra’s share price rose along with progress on the proposed Inflation Reduction Act, which would include support for renewable energy.

Cheniere Energy is an energy infrastructure company that owns and operates U.S. liquefied natural gas (LNG) export facilities along the U.S. Gulf Coast. Cheniere’s share price benefited from the continued tightness in global LNG markets as a result of Russia/Ukraine tensions.

Turning to Western Europe, French rail operator Getlink (+0.65%) and Spanish communications company Cellnex (+0.56%) 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. Getlink’s tunnel traffic continues to recover following the easing of lockdowns across the U.K. and Europe, and Getlink’s Eleclink project was finally placed into service in May and began generating cash flow.

Cellnex is Europe’s leading independent infrastructure owner and operator for wireless telecommunication. Cellnex’s share price increased in July following the announcement that Cellnex was unsuccessful in buying Deutsche Telekom towers, removing a market concern about Cellnex both overpaying and potentially needing to raise further equity to fund such a large acquisition.

Japanese rail operator East Japan Railway (-0.02%) was the largest detractor from monthly performance.

East Japan Railway (JR East) is Japan’s largest passenger railway operator. Transporting 17 million passengers per day, JR East operates the Shinkansen highspeed rail lines north of Tokyo, as well as commuter trains within the Tokyo metropolitan network. The share price of JR East fell as COVID-19 cases rose in Japan.

All returns are in local currency.

Positioning and Outlook

On a regional level, the strategy’s largest exposure is in the U.S. and Canada (60%) and consists of exposure to regulated and contracted utilities (34%) and economically sensitive user pays infrastructure (26%).

For the Global Infrastructure Value Strategy, the primary quantitative tool in portfolio construction is excess return, on which our stock-ranking system is based.

Monthly Stock Highlight

This month we review U.K. electric utility SSE.

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.

Around 90% of SSE’s value is derived from either fully regulated transmission and distribution networks or quasi-regulated, government-mandated renewables which have index-linked revenues and long-term contracts. The majority of investment planned for the coming years is dedicated to the network and renewables businesses. This means its long-term cash flows are largely predictable in nature.

We see SSE as well-positioned to benefit from the U.K.’s green recovery and energy transition ambitions, including the 40 GW offshore wind target by 2030. SSE’s five-year investment program has about 80% dedicated to fully regulated networks or government-mandated renewables with inflation index-linked revenues and represents a significant acceleration from its last plan. Its renewables capacity is expected to more than triple in the next decade, as enabled by its over 15 GW pipeline, while gross network regulated assets value (RAV) would more than double, underpinning a five-year EPS CAGR targeted at 5%–7%. It is expanding its wind capacity pipeline, not only in the U.K. and Ireland, but also overseas, such as in Japan.

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