IFA magazine: why is ESG so important for listed infrastructure?
AA: For our strategy, it’s the nature of what we’re actually investing in, the nature of the asset class. We are investing in fixed, immovable, real assets at the core of the businesses that we hold in the portfolio. They typically have impact and they also are exposed to potential impact; think of climate-change related events such as flooding, storms, forest fires etc. These things pose a risk to those assets. Those assets could also become stranded for one reason or another, depending upon what they’re used for. So our ESG approach is one of examining the sustainability of the assets and, of course, the businesses, because that’s the governance element, the societal impact of those assets and any exposures that they may be at risk of. That is the proprietary approach we take. There are obviously financial implications of these kinds of risks. Our objectives are to protect our investors and protecting their capital. That’s how our ESG approach is structured for the strategy.
IFA Magazine: how does inflation affect the asset class?
AA: It’s a complicated question because I’d have to say when, how and in what form. Very often, inflation fears can manifest themselves in listed infrastructure types of businesses from a sentiment point of view. It’s the historical linkage between inflation risk and interest sensitive businesses, because these are all dividend paying companies that we hold within the portfolio. This tends to give us some wonderful opportunities because our ultimate protection and hedge against inflation in this portfolio is exactly what I discussed earlier, is that focus on growth. In my opinion growth is your best hedge against inflation risk. So, if we think about the kinds of businesses we invest in and where they get the growth, you can very quickly conclude that having inflation accompanying growth, even if that means the higher interest rates that go along with it, can certainly benefit these businesses. Let’s consider a toll road infrastructure business, for example. What does that toll road need? What it wants is growth, it wants recovery, passenger traffic, cargo traffic etc. Inflation allows the business to increase its tolls.
And so you get this effect where the economic sensitivity, the growth, the inflation, even the higher interest rates can positively impact these businesses. I’d say about two thirds of our portfolio itself has some form of inflation linkage in terms of protection. Sometimes it’s explicitly contractual, like you tend to find in social infrastructure or less direct in certain economic infrastructure businesses. It can even be in commodity price linkages where you have infrastructure that is serving commodity producing types of businesses.
These offer protections within the strategy. We have an objective to grow our dividends, expecting them to grow at a rate in excess of the G7 inflation rate, and this is how we seek to protect our investors from the eroding returns that inflation can sometimes bring.
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.
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About Alex Araujo
Alex Araujo joined M&G’s equity income team in July 2015 and became co-deputy manager of the M&G Global Dividend strategy in April 2016. He has been manager of the M&G Global Listed Infrastructure strategy since it was launched in October 2017, and was appointed manager of the M&G Global Themes strategy in January 2019. Alex has 25 years of experience in financial markets, having previously worked at UBS and BMO Financial Group. He graduated from the University of Toronto with an MA in economics and is a CFA charterholder. 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.
