For today’s discerning financial and investment professional
GLOBAL LISTED INFRASTRUCTURE A special supplement in association with M&G
Global Listed Infrastructure investing - Alex Araujo
Discussion on building the modern world
November 2019
ANALYSIS
REVIEWS
Downside protections without forgoing upside
ISSUE 1
COMMENT
INSIGHT
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I NTRODUCTION
LIVING WITH UNCERTAINTY Why global listed infrastructure is the asset class we can’t live without
If there’s one thing that investment markets and managers find particularly challenging, it’s dealing with uncertainty. The dark clouds of uncertainty having been lurking around the global economy for a long time now and many market watchers are surprised that markets as a whole have managed to avoid responding too negatively. But what lies ahead? Should we be bracing ourselves for a downturn? When it comes to making asset allocation decisions, how do you make sound long term strategic plans for client portfolios when there is so much doubt and uncertainty about what’s going on in political spheres as well as the global economy? DIVERSIFICATION IS THE ONLY FREE LUNCH Diversification is the only free lunch in investing. This was the phrase coined way back in 1952 by Nobel Prize winner Harry Markowitz, one of the founding fathers of modern portfolio theory. It might have been 67 years ago when he said it, but the philosophy still holds just as good today as asset allocators look to make efficient long-term investment decisions on clients’ behalf. Philosophy is one thing, but in today’s complex world how can you find an asset class which truly complements a client’s diversified portfolio, adding something different to the mix whilst offering attractions for growth and income?
and liquidity which is increasingly gaining acceptance within the investment community. Its attractions include offering an effective means of clear portfolio diversification as well the scope for delivering capital growth and predictable cashflows. Now two years old, the M&G Global Listed Infrastructure Fund invests in the foundations of a modern society – from the physical assets that provide our water, energy and transportation needs, to the education and healthcare facilities that foster our society, and the communications networks that connect us in an increasingly digital world. Within this digital supplement, Alex Araujo, the fund’s infectiously enthusiastic manager, lifts the lid on this exciting asset class. Over the following pages, we talk to him about why he believes the sector offers such promise and also the processes that he has put in place to ensure that the fund is well-positioned to meet long-term investors’ needs. In today’s uncertain world, the attractions of a sector demonstrating lower volatility and limited downside during market shocks is likely to continue to appeal. Sue Whitbread Editor IFA Magazine
THE CASE FOR GLOBAL LISTED INFRASTRUCTURE Infrastructure as an asset class is well-established as a complement to multi-asset portfolios primarily in the private realm. It is also an asset class with breadth, depth
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INVESTING IN PEOPLE’S JOURNEYS – FROM TOLL ROADS IN NORTH AMERICA TO AIRPORTS IN EUROPE One of the holdings in the M&G Global Listed Infrastructure Fund portfolio. Ferrovial is one of the world’s leading infrastructure operators with a collection of high quality, long life assets which command high barriers to entry. The critical nature of the underlying assets epitomises the attractions of infrastructure as an asset class.
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he company is based in Spain, but the biggest contributor to group cashflow is the ETR 407 toll road in Toronto. The highway serving Canada’s largest city not only alleviates traffic congestion but is also arguably the best infrastructure asset in the world for investors. The asset benefits from unregulated pricing and a 100-year concession life of which more than 80 years remain,
the combination of which leads to a long-term stream of cashflows with inflation-beating characteristics. The highway network has benefited from and expanded with Toronto’s urban growth and employs an efficient toll system which ensures automated billing without requiring the driver to stop at tollbooths and disrupt the free flow of traffic. Ferrovial also manages highway concessions in the US and Europe (primarily Spain and Portugal) and has been an innovator in the industry, introducing new concepts such as managed lanes on the LBJ highway in Dallas which provide dynamic pricing determined by levels of traffic with the goal of ensuring faster journey times (for a price). Ferrovial also operates four UK airports (London Heathrow, Glasgow, Southampton and Aberdeen) as well as Denver International Airport in the US. The airports business is a beneficiary of structural growth trends from rising Asian and emerging market passenger volumes. Listed airport companies remain on a significant discount to the high multiples paid in the private market by pension funds for single assets.
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LISTED INFRASTRUCTURE:
ESSENTIAL ASSETS FOR THE MODERN AGE Alex Araujo, Fund Manager at M&G Investments, makes the case for investing in global listed infrastructure
WHY INVEST IN GLOBAL LISTED INFRASTRUCTURE? Infrastructure holds an important place in the fabric of modern society, serving as the backbone of the world economy. In its broadest sense, infrastructure refers to assets associated with the provision of essential services for the functioning of global society such as utilities and transportation networks. These types of businesses typically provide stable and growing cash flows, often backed by inflation-linked revenues and the predictability derived from long-term contracts. The favourable characteristics of infrastructure can be accessed in different ways, but the attractions of investing in listed infrastructure companies include liquidity, access for retail investors to invest in the asset class, and higher yield and lower volatility relative to global equities. WHAT ARE THE BENEFITS FOR AN INVESTOR’S PORTFOLIO? The predictable cashflows generated by infrastructure assets provide clear diversification benefits for investors’ portfolios. History shows that investing in listed
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infrastructure enhances the returns generated by an investor’s equity exposure, while reducing the overall level of risk. The importance of taking a long-term approach cannot be emphasised enough because the longer the holding period, the more pronounced the potential benefit. Past performance is not a guide to future performance. WHY M&G GLOBAL LISTED INFRASTRUCTURE FUND? The M&G Global Listed Infrastructure Fund is a high conviction fund holding 40-50 companies that exhibit strong and growing cashflow dynamics. As a result of these characteristics, we expect dividends from these companies to increase sustainably over the long term. Through the consistent application of this approach, the fund aims to meet two objectives: • Deliver a higher total return (the combination of income and growth of capital) than the MSCI AC World Index over any five-year period • Increase the distribution paid to investors every year in sterling terms
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The fund is managed with a long-term investment horizon, consistent with the long-life nature of infrastructure assets, and follows a disciplined investment process which incorporates ESG, to deliver on its performance objectives.
Histor y shows that investing in listed infrastructure enhances the returns generated by an investor ’s equity exposure, while reducing the overall level of risk
By investing beyond the traditional realm of economic infrastructure (utilities, energy and transport) and diversifying into social (health, education and security) and evolving infrastructure (communication, transactional and royalty), we aim to provide a balanced portfolio which showcases the best attributes that listed infrastructure has to offer and better reflects an increasingly digital society. IMPORTANT INFORMATION The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments. The value from the fund’s assets will go down
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as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash. TO FIND OUT MORE PLEASE VISIT: WWW.MANDG.CO.UK/INFRASTRUCTURE
About Alex Araujo Alex Araujo has been the manager of the M&G Global Listed Infrastructure Fund since it launched in October 2017, and was appointed manager of the M&G Global Themes Fund in January 2019. Alex initially joined M&G’s income team in July 2015 and became codeputy manager of the M&G Global Dividend Fund in April 2016. Alex has 25 years of experience in financial markets. He graduated from the University of Toronto with an MA in economics and is a CFA charterholder.
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BUILDING THE MODERN WORLD As the backbone of the global economy, infrastructure plays a crucial role in development, and ultimately prosperity. Yet not enough is being invested in the assets that provide society’s essential services. That’s the view of Alex Araujo, Fund Manager at M&G Investments, as he argues the case for advisers to consider infrastructure investment as a global asset class which has breadth and depth as well as liquidity
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n the developed world, spending on the care, maintenance and expansion required for the adequacy of our existing infrastructure has fallen woefully short of the mark, leaving our critical assets creaking and bursting at the seams. We can all relate to this in our daily lives. Infrastructure investment in the G6 members – US, Canada, UK, Germany, France and Japan – has been in a multi-decade decline and the
current 3.5% of GDP is the lowest level since 1948 (see Figure 1). Today’s 70-year low is half the level it was at its peak in the 1960s – which also highlights the ageing nature of these assets. With government finances under pressure and limited expertise in the public sector, the private sector will play a significant role in the restoration and upgrade of our critical infrastructure.
FIGURE 1. Infrastructure spending in the developed world G6 Government Gross Investment as % of GDP 7%
6%
5%
4%
3%
2% 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2112 2017 2022
Source: BofAML, The Long View, 16 September 2018.
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Global spending on economic infrastructure, which covers transport, electricity, water and telecoms, was US$2.5 trillion in 2015. This contrasts sharply with the required amount of investment estimated at US$3.7 trillion per year (see Figure 2). The resulting US$1.2 trillion shortfall needs to be addressed to ensure that the world stays on its economic growth path. Investing the annual requirement of US$3.7 trillion to the year 2035 – a typical infrastructure investment cycle – would result in aggregate spending of around US$69.4 trillion. Owing to rapid urbanisation and fast-growing populations, emerging markets account for more than 60% of the demand. China alone makes up a third. From China and India to Latin America and Africa, building the infrastructure which is required to ensure higher living FIGURE 2. The Infrastructure investment gap Global spending requirements for economic infrastructure 2017 – 2035
-$400bn
-$300bn
-$100bn
standards and support economic growth remains a work in progress. In the developed world, the US and Canada require the most investment, with 20% of the global target – double the amount required in Western Europe. The important role to be played by the private sector in addressing the infrastructure gap should create a meaningful tailwind for certain businesses. In particular, we believe that companies with existing physical infrastructure assets (which provide a strategic barrier to entry) and growth opportunities are best placed to earn a financial return on the required capital investments. Crucially, we invest in companies based on the quality of their assets and growth opportunities, not simply in order to follow an infrastructure ‘concept’. In the developed world, the US and Canada require the most investment, with 20% of the global target – double the amount required in Western Europe. IMPORTANT INFORMATION
Annual deficit 2017 – 2035, US$ -$400bn
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-$1.2trn
4.0
3.7
The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. TO FIND OUT MORE PLEASE VISIT: WWW.MANDG.CO.UK/INFRASTRUCTURE
3.0
US$ trillion
2.5 2.0 1.5 1.1 1.0
1.1 0.8 0.5 0.2
0.0
Transport
Power
2015
Water
0.4 0.5
Telecom
Total
20-2035 per annum
Source: McKinsey, Bridging infrastructure gaps: Has the world made progress? October 2017
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About Alex Araujo Alex Araujo has been the manager of the M&G Global Listed Infrastructure Fund since it launched in October 2017, and was appointed manager of the M&G Global Themes Fund in January 2019. Alex initially joined M&G’s income team in July 2015 and became co-deputy manager of the M&G Global Dividend Fund in April 2016. Alex has 25 years of experience in financial markets. He graduated from the University of Toronto with an MA in economics and is a CFA charterholder.
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I NVESTM BRIAN E NT TORA SPOTLIGHT
THE ASSET CLASS WE
CAN’T LIVE WITHOUT Having just passed its second anniversary in October, M&G Investments’ Global Listed Infrastructure Fund is well placed to celebrate. We get down to detail as we interview the fund’s infectiously enthusiastic manager, Alex Araujo, exploring not only the reasons behind his passion for the sector but also the disciplined processes which he has put in place to ensure that the fund is well positioned for future success
IFAM: Alex, you’re clearly very passionate about investing in global listed infrastructure. Can you explain to us why you think it presents such attractive opportunities and why you believe it should be on advisers’ and investors’ radar? A A: Infrastructure as an asset class is well-established as a complement to multi-asset portfolios primarily in the private realm. We have observed huge amounts of private capital going into global infrastructure projects and assets over the years. These are investments being made by the likes of sovereign wealth funds, pension funds, endowments and insurance companies etc. where the investment focus is on meeting long term liabilities and with very long term investment horizons. One point of note is that the returns from this sector tend to complement and be generally uncorrelated to other investments held in their portfolios. But private infrastructure investment tends to be for a privileged few. So in a sense, with the launch of our fund in 2017 we have democratised this asset class, providing access to it for investors in a liquid format by way of listed infrastructure businesses with many of the same types of characteristics underlying them as you see in the private
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realm. It is an asset class which is increasingly gaining acceptance within the investment community. Of course, managers will express their exposure to the asset class in different ways and I think it is important to have a number of different infrastructure strategies for advisers and investment managers to choose from. Like any investment strategy, there is differentiation here and it is important to understand this and to embrace it. We ourselves aim to invest in businesses with real physical long life assets with reliable cashflow streams and growing dividends. The characteristics which come from these businesses and assets are incredibly complementary and attractive to investor portfolios. One of the prime characteristics demonstrated by the asset class – and our strategy too – has been its ability to protect capital in more difficult market environments thereby protecting against downside risk. At the same time, because of the way we’re investing and what we’re investing in, we also have the opportunity to capture and participate in any upside when markets move higher. Because of this, I’m sure that advisers can see that we’re not just about offering a defensive strategy here and we are certainly not a bond proxy – which is something of a perception amongst the investment community when looking at this asset class.
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IFAM: Infrastructure is a broad term for the investment opportunity set. How do you go about defining your investment universe? A A: There are a number of different global listed infrastructure strategies operating across the UK investment market place. I believe that these strategies all offer something slightly different and I have the fullest respect for my peer group. Increasingly we are dealing with clients who will initially make a commitment to the sector within their portfolios and then will have exposure to more than one – maybe two or three - different strategies. These can work in a very complementary way. Our own starting point is the more traditional sphere of listed infrastructure, it’s what we call ‘economic’ or ‘core’ listed infrastructure. This relates to utilities, energy infrastructure and transportation infrastructure; but we have added two additional categories to the definition for our strategy to bring the asset class to the modern age. The first of these additional categories is social infrastructure, which covers facilities required for the provision of health, education and civic services. This category of infrastructure offers similar defensive characteristics to the economic sphere albeit with a different asset base which provides diversification benefits. The third category in which we invest and the most exciting from a growth perspective is what we call evolving infrastructure, which is built around the structural growth in areas such as communications. We all like to talk about this virtual world in which we live but we have to accept that there would be no internet or mobile communications without the distinct physical infrastructure which makes these modern marvels possible. Whether it is the mobile phone towers or data centres for example, it all matters. We take a broader approach to infrastructure and focus on seeking out growing income streams from the businesses we invest in. We are not just about delivering a high yield for investors though. As an integrated part of our investment process, we also apply an ESG (environment, social and governance) approach to ensure the sustainability of businesses and assets. In broad terms, that’s how I’d summarise the way we define our investment universe.
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IFAM: When it comes to the M&G Global Listed Infrastructure fund, how do you and the team go about making asset allocation and stock selection decisions? What’s the investment strategy and process? A A: We run a concentrated strategy, holding generally between 40 and 50 companies within the portfolio. This means that we have to know and understand these businesses intimately well. We take a bottom-up approach to selecting the businesses in which we invest and only select those with high quality, sustainable, long-life assets that have some form of strategic advantage. Very often there may be a physical barrier to entry which allows us to determine the confidence level in the cashflow stream that we will get from those businesses and the contracts that are behind those streams. We will look for growing dividends, so that we can deliver a growing income stream for our investors. On top of this, the ESG filter is integrated into the approach to ensure sustainability lies at the heart of what we do. We have to ask ourselves what we’re paying for that sustainability and those cashflow streams – so looking at valuations is a critical element. Next, we ensure that we are properly diversified across each of the broad categories of infrastructure in which we invest. There are sub-industries in each category so in total we actually have nine subcategories. Because we operate a global strategy, we are also diversifying regionally. Interestingly, there are different types of dividend growth that we will get from different businesses. We will diversify across those types too. Some are rapidly growing – such as those in the evolving infrastructure space – others are more consistent but growing perhaps at a rate in line with inflation. Then from some we will get a GDP or GDP plus growth rate in the underlying income stream. We believe it's important that we diversify across a number of different considerations which ultimately link in with those characteristics we talked about earlier, such as downside protection and the ability to participate in rising markets as well. I should add just a word or two about liquidity. These are companies which are listed on mainstream exchanges
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throughout the world with full daily liquidity. Should it ever be needed, we could liquidate this fund completely to 100% cash and relatively easily within a matter of days. There are no privately held investments and no highly illiquid assets. IFAM: How does the team approach work within the fund? A A: I work within the income team at M&G. Our approach dictates that we be less focused on the absolute yield, with the emphasis is on the growth in the income stream. We have a number of fund managers who have wide experience in this style of investing and in this strategy. This also came out of the fact that our Global Dividend Fund has more than 11 years of history investing in these types of businesses from the outset. So we know what to look for and what is attractive in these types of business. In fact, there are a small number of overlapping holdings across the four strategies run by the income team. Looking more closely at the Global Listed Infrastructure fund however, I have a dedicated analyst on the strategy. Also, we have a deeper analyst team that covers companies on a sector by sector basis that we draw from and other embedded analysts in the team looking at these businesses too. We also interact quite closely with our private infrastructure group; interactions which are incredibly useful for sharing observations on the asset class, transactions and valuations on transactions etc. We also work with the credit analysts from the fixed income team and collaborate on the businesses we’re invested in. Overall, we feel incredibly well resourced in covering this asset class. When it comes to interaction with our ESG team here, we have regular meetings and ongoing dialogue with the group. They also assess our portfolios regularly, looking for existing or potential controversies, as well as each company’s direction of travel. Often when we meet with companies, members of our ESG team will join us at the meetings to more deeply engage with the management so that the working relationship is very close. Within our ESG process one thing we don’t do is to take third party rankings and ratings of businesses as a given. We do our own work from an ESG standpoint and we make sure that we are
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accountable for every holding. We don’t use a negative screening process either as we don’t believe it fully assesses the prospects for a business as it is quite prone to error. However, we do use third party providers as a source, as an input in the same way that we use research analysts who cover our companies. Ultimately though, we do the work ourselves. IFAM: Is it a constraint having twin objectives of delivering capital growth as well as an increasing income? Where does the emphasis lie? A A: This is an important question as it’s a both an academic and an ideological one. In fact, we resolutely believe that income growth and capital growth work hand in hand. When we invest in a business, we won’t know how the market will value it over time but we can get a handle on its ability to grow its income stream. If it can do so progressively and sustainably – for example without having to borrow money to pay an increasing income stream – then we believe that capital markets will reward that income value by increasing the equity value of the business. So our ideal investment is a company which consistently grows its dividend over time but that its dividend yield overall doesn’t really change or perhaps even declines – as a result of the capital value adjusting for the value of the sustainability of that income growth. We strongly believe that capital growth and increasing income absolutely are inextricably linked. IFAM: How do you manage risk in the portfolio and ensure that there is effective diversification for investors? A A: There are two parts to this. The first one is in the way that we established and built the strategy in the first place. Secondly, there’s the way that risk is monitored and addressed on an ongoing basis in co-operation with our risk team. So on the first point, we talked earlier about the three broad categories of listed infrastructure and each of the sub categories within those. When we built the framework
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for allocations to each category and sub-category, this was done following a rigorous assessment of the volatility versus return trade off of the underlying companies in the investible universe of each category. So we built a framework and allocation range to cover these which is embedded in the process. Broadly speaking, economic infrastructure is between two thirds and three quarters of total exposure, social infrastructure is between 10% and 20% and evolving infrastructure between 15% and 25%. These ranges were established to minimise risk and maximise return. The position size, weighting target etc. build up to that. Finally, there’s the regional element of diversifying via a global strategy and making sure that we have a mix of business and regulatory risk – as many of the businesses have some form of regulatory oversight whether it is moderate or comprehensive. IFAM: Looking ahead, where to do you see the most attractive investment opportunities within the sector? A A: I must admit that I’m very excited about all the opportunities we have right across the portfolio and that we have confidence in each of our holdings across all of the categories. That said, from time to time, the market throws up wonderful opportunities. At the moment, I see particular opportunities in energy infrastructure. The market can become concerned in the short term about the industry and sector, which creates buying opportunities which we can capitalise upon. We’ve been steadily increasing our allocation here and now have five holdings
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which amount to roughly 16% of the portfolio overall. The other area where we see particular ongoing opportunity is in transportation infrastructure where there is significant upside for capital investment for the companies underlying the exposure. Ultimately, this makes for strong return potential and for a growing income stream from these projects. We’ve been adding exposure here too. Finally, the structural growth which is inherent in communications infrastructure keeps us excited about this component of the strategy. We are getting very high rates of growth in cashflow streams from businesses associated with the digital economy which is increasingly pervading our lives. The investment case is compelling. IFAM: How has the asset class fared through the market’s ups and downs recently? Does it offer any particular characteristics that may appeal to investors? A A: Listed infrastructure’s outperformance during turbulent times is not just a reflection of market sentiment which can be fickle; the resilience of the asset class is justified by solid fundamentals and the operating performance of individual companies. There is empirical evidence to demonstrate the resilience of these business models, arising from the critical nature of underlying assets. History shows that the cashflows (illustrated in fig 1 by EBITDA) generated by listed infrastructure businesses and the dividends paid from them remained relatively stable during the financial crisis before resuming their upward trajectory.
Fig 1. The M&G Global Listed Infrastructure Fund: Investible Universe EBITDA and Dividend Growth 2000
1500
1000
500
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EBITDA
Divided
(Rebased: 2001 = 100) Source: M&G Investments
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Over the last few years we’ve done some work breaking down the market’s returns into various episodes and looked at how the strategy has performed and why – and where the performance has come from – in each of those episodes. Broadly speaking, what we found was that when the wider equity market finds itself in a difficult period – for example in Q4 of 2018 or more recently the month of August this year – these are the environments where this asset class really shines. In the case of August, we saw the strategy increase capital whilst the overall market was down. Of course, that was only one month but it is an indicator that this asset class at the very least provides downside protection and preserves capital which is a great starting point for when markets start to recover. When this happens we aren’t left behind, we are able to participate as we are invested in businesses which have underlying growth characteristics and can grow their income streams. There are certain types of markets – what I call the ‘go-go markets’ - when there is much excitement in sectors such as technology which people get drawn to. We won’t necessarily keep up in these times, with those of course, but we can still participate in the upside. Over the long term, these characteristics of downside protection along with strong growth prospects on the upside, allows the strategy the potential to outperform and with lower volatility than the broader market.
About Alex Araujo Alex Araujo has been the manager of the M&G Global Listed Infrastructure Fund since it launched in October 2017, and was appointed manager of the M&G Global Themes Fund in January 2019. Alex initially joined M&G’s income team in July 2015 and became co-deputy manager of the M&G Global Dividend Fund in April 2016. Alex has 25 years of experience in financial markets. He graduated from the University of Toronto with an MA in economics and is a CFA charterholder.
In both scenarios, we’ve found that the contribution comes from different places at different times within the portfolio. This really emphasises the importance of diversification across the various categories in which we invest and helps us to offer a more robust solution for investors. Finally, we’re excited by the increasing interest we’re seeing from our clients. The strategy's assets overall are already well over £200m, having started from a very low base. I’m pleased to say that I was the first private investor in the fund because I want to be completely aligned with our investors in delivering on our objectives. I also want to enjoy the prospects for growth and rising income to help me to deliver on my own objectives for the future.
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INVESTING IN THE PHYSICAL NETWORKS THAT ENABLE OUR DIGITAL SOCIETY Equinix owns and operates data centres around the world and is a beneficiary of the structural demand for data globally. The company is one of the holdings in the M&G Global Listed Infrastructure Fund portfolio.
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he proliferation of data in today’s modern society is driven by the development of technology, including e-commerce, cloudbased applications, connected devices and the internet of things (IoT), but this insatiable appetite can only be met by the support of highly connected physical infrastructure assets such as data centres. Data centres perform a critical function in the digital economy. They provide an indirect way of accessing the high growth potential of companies such as Amazon.com, Microsoft and Google whose business models are reliant on data centres for their long-term growth and success.
also mission critical. For example, the payments company Visa experienced a network failure in June 2018, resulting in millions of transactions being declined, the issue being attributed to a glitch at one of its data centres. Equinix has a global reach with more than 200 data centres spread across 24 countries and benefits from a business model with high recurring revenues. The company is classified as a real estate investment trust (REIT) and as such can be susceptible to short-term negative sentiment when interest-rate sensitives are out of favour, but our investment case is based on the structural growth in the industry which is reflected in the strong growth in profits and dividends that the company has delivered over time.
Location is key for the customer and provides a barrier to entry. Security, reliable power supply and functionality are
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DOWNSIDE PROTECTION WITHOUT FORGOING UPSIDE
Alex Araujo, Fund Manager of the M&G Global Listed Infrastructure Fund, highlights the resilience of listed infrastructure as an asset class.
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he defensive qualities of listed infrastructure have proved their worth during recent market downturns, but the outperformance of the asset class during turbulent times is not just a reflection of market sentiment, which can be fickle.
companies. There is empirical evidence to demonstrate the recession-proof nature of these business models, which arises from the critical nature of the underlying assets. History shows that the cashflows (illustrated in Figure 1 by EBITDA) generated by listed infrastructure businesses and the dividends paid from them remained relatively stable during the financial crisis before resuming their upward trajectory.
The resilience of the asset class is justified by solid fundamentals and the operating performance of individual
Fig 1. M&G Global Listed Infrastructure Fund Investible Universe EBITDA and Dividend Growth (Rebased:2001 = 100) EBITDA
Dividend
2,000 1,500 1,000 500 0
2001
2003
2005
2007
2009
2011
2013
2015
2017 2018
Source: M&G Investments. Past performance is not a guide to future performance.
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The immediate macroeconomic environment has little bearing on the operational performance of infrastructure assets
GROWING DIVIDENDS The attraction of listed infrastructure is not limited to defensiveness; the asset class offers a wide array of growth opportunities to drive inflation-beating returns over the long term. We strongly believe that our holdings – all of which pay growing dividends, reflecting the growth in the underlying businesses – should not be treated as bond proxies, which, by definition, offer a high yield with no growth. Even our holdings in utilities are beneficiaries of structural growth, in addition to the inflation-linked revenues which are the mainstay of their business models. The long-term tailwinds that well-positioned utilities can capture include modern society’s transition to renewable energy, or the development of smart grids to better manage the supply and demand of power – themes which are likely to persist for decades to come. UNDEMANDING VALUATIONS Many of these holdings have performed well, but we see further upside as valuations continue to look undemanding given their long-term growth prospects. Valuations in the economic class of infrastructure (utilities, energy and transport) remain well below their historic highs and look particularly compelling in energy. Economic infrastructure also looks attractive relative to the other segments of infrastructure, namely social (health, education and civic) and evolving (communication, transactional and royalty). Past performance is not a guide to future performance. That said, we still believe it is important to extend the definition of infrastructure beyond the traditional realm
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of economic infrastructure to better reflect the increasingly digital world we live in. The social and evolving categories provide benefits of diversification as well as valuation opportunities depending on the market environment. The evolving segment also stands out as a generous source of growth. It is also important not to lose sight of the long term nature of the asset class. The immediate macroeconomic environment has little bearing on the operational performance of infrastructure assets. Powerful trends in the global economy – and the growth afforded by these long-term trends – will have a greater influence on listed infrastructure companies and returns from the asset class over the long term. The vagaries of economic cycles are a mere sideshow compared to the structural growth on centre stage. IMPORTANT INFORMATION
The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.
About Alex Araujo Alex Araujo has been the manager of the M&G Global Listed Infrastructure Fund since it launched in October 2017, and was appointed manager of the M&G Global Themes Fund in January 2019. Alex initially joined M&G’s income team in July 2015 and became co-deputy manager of the M&G Global Dividend Fund in April 2016. Alex has 25 years of experience in financial markets. He graduated from the University of Toronto with an MA in economics and is a CFA charterholder.
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THINKING
BIG Why evolving infrastructure can often be out of sight but should not be out of mind. It’s a powerful argument and one put forward by Alex Araujo, Fund Manager of M&G Global Listed Infrastructure Fund, as he reminds advisers of the investment potential offered by this dynamic asset class
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hen we think of infrastructure, large physical assets typically spring to mind. This is because the likes of airports, roads and power stations have physical footprints that shape the environment around us and our perceptions of it. However, our interaction with physical infrastructure goes well beyond the use of transport, energy and utilities. For example, the delivery of many public services like education and healthcare generally involves large buildings, such as hospitals, schools and university campuses. SUPPORTING THE DIGITAL REVOLUTION Less obvious perhaps is the infrastructure that facilitates the digital economy. It may not dominate the landscape like electricity pylons or ports, but the buildings and networks underpinning it are equally relied upon today.
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This is perhaps because many digital interactions have become so frictionless that we rarely think about the infrastructure supporting them. Yet behind each contactless payment, for instance, is a vast network of ‘rails’ connecting consumers, merchants, processors and banks. Even when the infrastructure enabling online activity has a large physical presence, it is often out of sight. When we stream videos on our mobile phones, it is unlikely that we spot the communication masts or underground optical fibre networks that transmit the data along our journey. Likewise, when we store digital documents and photos on ‘the cloud’ – where they are accessible wherever and whenever we might want them – how many of us spare a thought for the vast warehouse-like data centres that store and process our information? Each day, we depend on this unseen infrastructure – which I like to think of as ‘evolving’ infrastructure – every bit as much as we do on the more familiar infrastructure that forms the backbone of the traditional economy.
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M&G I NVESTM E NTS
INVESTMENT OPPORTUNITIES As a long-term investor in infrastructure, this part of the asset class holds great promise, in my view. I believe evolving infrastructure can often provide stronger structural growth than more traditional infrastructure assets. This is because it is used by fast-growing parts of the global economy – including communications, e-commerce and technology. It logically follows that more of this infrastructure will be needed increasingly over the coming years. The more we use our mobile devices to bank, shop and view content, the more phone masts will be needed to transmit the data – and, of course, the more data centres will be required to process it. Growing demand should present opportunities for patient investors.
November 2019
Admittedly, the trajectory of evolving infrastructure assets, and the income generated from them, can be less predictable than that of some more traditional infrastructure assets. The likes of energy and water providers are typically better able to reliably churn out a consistent income from when you invest, given the established and resilient demand for their services. However, therein lays the opportunity offered by evolving infrastructure: if companies succeed in rapidly expanding parts of the infrastructure market, they can deliver exciting levels of growth over the long term. For this reason, I believe that infrastructure investors must be alive to the various opportunities offered by evolving infrastructure assets, even though they can easily go unnoticed in most people’s daily lives. IMPORTANT INFORMATION
The more we use our mobile devices to bank, shop and view content, the more phone masts will be needed to transmit the data – and, of course, the more data centres will be required to process it
The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.
About Alex Araujo
One way to tap into this area of the market is to invest in the shares of companies that own or control this critical physical infrastructure. These companies generate income streams from their infrastructure assets, which are in turn distributed to their investors through dividends. Importantly, even though these assets are often unseen, their physical nature provides a strategic barrier to entry for would-be challengers, protecting the value of the income as well as that of the asset itself.
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Alex Araujo has been the manager of the M&G Global Listed Infrastructure Fund since it launched in October 2017, and was appointed manager of the M&G Global Themes Fund in January 2019. Alex initially joined M&G’s income team in July 2015 and became co-deputy manager of the M&G Global Dividend Fund in April 2016. Alex has 25 years of experience in financial markets. He graduated from the University of Toronto with an MA in economics and is a CFA charterholder.
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