This week’s interview is with Tom Walker, manager of the Schroder Digital Infrastructure fund, who discusses with the FundCalibre team how advancements, particularly in artificial intelligence (AI), have significantly amplified the demand for digital infrastructure.
Why you should listen to the interview: Despite challenges like rising interest rates and material costs, this sector is seen as critical to the growth of many companies that are slowly incorporating AI into their systems. But it’s not just AI that will provide long-term performance for the sector; Tom offers insights into companies that will additionally benefit from our need to stay connected with the rest of the world.
This interview was recorded on 21 May 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
Digital infrastructure has become mission critical
“The outlook is stronger than a year or so ago. The real reason for that is the clear advent of AI and how that is going to become an essential part of our lives going forward. AI has been a complete game changer for the digital infrastructure space over the last 12 to 24 months.
“What’s interesting about AI and the increased demand that’s going to lead to. That’s on top of an already pretty bullish scenario where you’ve got exponential growth in data, you’ve got network bandwidth and latency issues, you’ve got security and privacy issues, and then sustainability, all powering demand for this sector. So, AI really is making this digital infrastructure sector even stronger than it was 12 months or so ago.”
AI growth boosts fund holdings
“Data centres are absolutely the number one beneficiary today of artificial intelligence as these are where AI ‘lives’. So, as the Microsofts, Amazons and Metas of this world look to build out their artificial intelligence infrastructure that they need, it is all in data centres at this point in time so that is absolutely the part of the portfolio seeing the greatest growth, the greatest demand for new data centres to come through, but also it’s not going to end there.
“What we think will happen is that artificial intelligence will eventually end up on your phone and there’s going to be far more wireless communication. That’s going to involve the mobile phone towers so we’re very positive when we think about the outlook for towers. And obviously, the fibre that connects a data centre to a tower is also part of the portfolio. Ultimately, it’s going to end up in more transmission, more information going through the fibre networks and then ultimately more being broadcast wirelessly from towers to people’s mobile phones.
“So, at the moment it’s data centres, but we think it’s just a matter of time before we see that increased demand impact other parts of the portfolio.”
Lowering interest rates can promote returns
“Interest rates have been a real albatross around the neck of the sector for two years or so now. Even before interest rates started to go up, because inflation was increasing we saw the cost of raw materials also increasing. That has just meant for a very long period of time that it’s a lot more expensive to build, just in putting together those raw materials that you need to build a mobile phone tower or data centre. That’s one element of the equation.
“The other element is interest rates and the cost it will now incur if you want to buy or build some new digital infrastructure; it’s made it much less attractive to create that new supply. We’ve also seen a repricing of assets as interest rates have increased and valuations have therefore fallen over the last couple of years.
“But what we believe now is that the listed market has priced in this new interest rate environment and we see very attractive valuations across data centres, towers and fibre networks. The market has priced ahead, they understand the new cost of finance and we think they’re also attractively valued considering the increased amount of demand that’s coming through for these assets. So yes, values have fallen over the last couple of years, but we think that they are absolutely in the right position now to generate strong total returns going forward.”
Stocks that will benefit from the AI push
“One of the developed market examples that we like is Next Data Centres who are an Australian group. They’re one of the fastest growing data centre companies in that region. They have very strong demand from all the hyper-scalers like Microsoft or Google. And they recently raised equity earlier this year to buy out more of their development pipeline. Basically the management team was so confident that the demand was there, that the pipeline we thought they might build out over a three to five year period, they want to build now. They want to raise equity to build that pipeline out because they’re very certain it’s going to be leased very quickly by these hyper-scalers.
“In the developing markets, Helios Towers is a really interesting company; they give us exposure to mobile phone towers in Africa. Helios is a real play on the increase in connectivity to boost the low levels of internet penetration across Africa and they give us pure tower exposure across Africa – about 82% in Africa, and then about 18% in Oman. We think that their earnings are going to grow very quickly. We think they’re in a very dominant position to be the partner of choice for most of the mobile network operators in many of the countries across Africa.
Conclusion: Tom provides a short and sweet overview of the potential in this sector in the full interview, particularly in relation to the growth of AI as well as meeting the needs for increasing global connectivity. And importantly, how the Schroder Digital Infrastructure fund is set to benefit from these trends.
Main image: h-heyerlein-ndja2LJ4IcM-unsplash-
