Juliet Schooling Latter, research director, FundCalibre continues her series for Professional Paraplanner, examining funds at or approaching their three-year track record.
Having traditionally been the domain of the institutional investor, the past decade has seen infrastructure become increasingly available to the retail market. It’s not hard to see why, given it’s a sector with exposure to essential services with strong pricing power, structural growth, high barriers to entry and steady cashflows.
It’s an essential element of modern society which has stability – and right now stability is everything. Whether it’s roads or hospitals, infrastructure always needs to be built and renovated. It’s also a defensive asset class with a link to inflation through the likes of concession agreements. But the golden ticket has been the consistent yields in a low interest rate world.
Traditionally the realm of utilities, energy pipelines and transport, the universe and nature of infrastructure companies is also expanding and it’s an area this month’s fund has been keen to tap into.
The M&G Global Listed Infrastructure fund launched in October 2017 and looks for a balance of growth and income from three key areas of the sector: economic, social and ‘evolving’ infrastructure.
Manager Alex Araujo was recruited to M&G by Stuart Rhodes, manager of the M&G Global Dividend fund. Alex was an external sell-side analyst providing Stuart assistance in finding infrastructure names with a growing dividend stream. Stuart hired him initially as a deputy fund manager – a role he still retains – before this fund launched.
Alex invests in three distinct infrastructure categories: economic infrastructure (between 65-75% of the portfolio), such as utilities and energy companies plus transport-linked areas including toll roads and airports; social infrastructure (10-20%) in areas like health, education and civil (federal and municipal building); and evolving infrastructure (15-25%) such as communications (mobile towers and data centres) and transactions, like payment companies and royalties.
Alex looks for companies with critical physical infrastructure, long-term concessions or perpetual royalties. They need to be paying some level of dividend and have a market cap of over $1bn. He will want to know about the dividend situation – its history and outlook – the capital discipline of the firm, and sustainability credentials. The latter part of the research is led by ESG analysis and overlayed with the UN Sustainable Development Goals. Fundamental analysis of the firm’s financial statements and meetings with management is integral.
He also looks at valuations, which will be based on the current share price and how it reflects the company’s characteristics and the dividend growth prospects. He will also consider the diversification any new company offers to the dividend profile of the fund.
The 40-50 stock portfolio has typically had little turnover since launch, however, Covid-19 created a number of unique buying opportunities with a further six names added since March. These included the likes of NextEra Energy Partners in the US and Italian multi-utility A2A, both renewables focused operations*.
The fund has not been immune to dividend cuts, with airport companies a principal contributor to the fall. However, the majority of the portfolio continues to deliver stable or rising dividends. The fund has thus far delivered on its objective of growing its income stream in the first six months of the financial year ending 31 March 2021*. The fund currently has an historic yield of 3.7%*.
The fund has returned 28%** to investors in the past three years with an ongoing charge of 0.85%***.
One of the big challenges facing listed-infrastructure funds is the ability to expand their investing universe. We like the approach taken by Alex with modern infrastructure investments – such as payment companies and data centres – as it genuinely differentiates the fund from its peers.
*Source: M&G Global Listed Infrastructure fund – Three years in the pursuit of reliable long-term growth
**Source: FE Analytics, total returns in sterling, 5 October 2017 to 5 October 2020
***Source: Fund factsheet, 30 September 2020
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
