Alex Araujo, Fund Manager of the M&G Global Listed Infrastructure fund, explains how he and his team are successfully managing the investment strategy three years on from launch. With a focus on achieving the fund’s twin objectives, Araujo explains why he and his team remain optimistic as they ever have been about the long-term growth opportunities in listed infrastructure
- The fund was launched in October 2017 with a clear focus on long-term growth opportunities in listed infrastructure.
- The fund pursues a modern approach to provide access to the full breadth of the asset class, including what we see as the structural growth trends in digital infrastructure.
- ESG is integrated in the investment process as a key consideration for seeking financial returns over the long term.
- The market downturn in March triggered by the onset of COVID-19 presented some attractive buying opportunities, in our view; we established six new holdings in utilities in our efforts to strengthen the fund’s income stream.
- Fiscal stimulus may provide a favourable tailwind as governments increase infrastructure spending to revive the global economy.
Philosophy and approach
Infrastructure holds an important place in the fabric of modern society, serving as the backbone of the world economy through good times and bad. As such, we believe that the stable and growing cashflows generated by the asset class across the vagaries of the economic cycle have an equally important part to play in investors’ portfolios over the long term.
Focus on listed companies with physical assets
Our strategy invests in listed infrastructure, with a clear focus on asset-backed businesses in the belief that physical assets provide a sustainable barrier to entry. We do not invest in private companies; we only invest in listed companies, which benefit from the liquidity inherent to publicly traded equities. By doing so, we have tremendous flexibility in our portfolio and our proprietary investible universe to seek to take advantage of opportunities presented by market events, such as the indiscriminate sell-off in March 2020 as the global pandemic took hold. We will continue to act on these types of opportunities.
We invest in critical infrastructure with physical backing, where the assets are long-life in nature. This long-term aspect is captured in concession businesses, which we believe can generate stable and growing cashflows over several decades, as well as royalty companies, which provide the ultimate in long-term cashflow streams because the cashflows from their physical landholdings can run into perpetuity.
Focus on dividend growth
We are resolutely focused on dividend growth in the belief that listed infrastructure provides a broad range of opportunities for long-term growth, from the inflation-linking in certain sectors to the powerful thematic trends driving digital infrastructure. Dividend growth is key to the fund’s objective of providing a rising income stream. In that context, the fund’s yield is an outcome of our stock selection. Listed infrastructure has typically offered a yield premium to global equities and the fund is currently offering a historic yield of 3.7% (GBP I Inc shares, as at 1 October 2020, preliminary data), compared to the MSCI ACWI Index’s 2.0% (Source: MSCI Inc., 30 September 2020), but this is very much an outcome. Our income priority is to grow the fund’s distribution for our clients.
A modern approach to listed infrastructure
Infrastructure is expanding rapidly beyond the traditional realm of utilities, energy pipelines and transport – sectors commonly known as ‘economic’ infrastructure. In order to capture the full breadth of the asset class and the qualities it has to offer in its entirety, we invest in three distinct categories: ‘economic’, ‘social’ and ‘evolving’ infrastructure.
‘Economic’ infrastructure accounts for the largest part of the portfolio with a typical weighting of 65-75%, but we also invest in the more defensive ‘social’ infrastructure, which covers facilities in the health, education and civic domain.
The ‘social’ segment typically accounts for 10-20% of the portfolio. ‘Evolving’ infrastructure, our third and final category, adds a unique profile. The long-term growth opportunities from communications infrastructure, transactional and royalty companies inject a new dimension to an asset class more commonly associated with stability. ‘Evolving’ infrastructure is expected to range between 15% and 25% of the portfolio.
Creating a balanced portfolio from these three infrastructure classes provides a diversified exposure to an asset class with compelling characteristics.
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