SW: Have you changed the portfolio of the Global Listed Infrastructure strategy very much recently, given all the turbulence we’ve been seeing in world markets?
AA: Our very high conviction view of the importance of natural gas infrastructure in the portfolio has undoubtedly benefitted us, of course, never wishing anything like this distressing invasion to have happened. It’s given us the opportunity to rotate some capital out of those natural gas infrastructure holdings and into others where we see value. Also, we’ve recently had a couple of takeover bids in the fund. To me, this really highlights the implicit valuation advantage of listed infrastructure businesses in the market vis-a-vis their privately-traded counterparts. Private equity players are actually seeing that opportunity and swooping in and taking advantage of valuation discrepancy. It does highlight that valuation/arbitrage opportunity in listed infrastructure listed companies of course, albeit subject to market sentiment and various phases of market behaviour to actually bring those opportunities about.
I’ve always said that I don’t believe that the listed equity market properly values long life infrastructure assets. That’s a great thing for strategies like this because we can capitalise on that and in a sense, democratise an asset class for everyday investors that is heavily sought after by private institutional sovereign wealth, insurance company, endowment type investors, I think, we really understand the valuations and have a very long term view of the opportunities presented by these kinds of businesses.
SW: That’s interesting as it really speaks to the diversification opportunities within the sector, where you’ve seen those arbitrage opportunities.
AA: Yes, although it rather depends on what strategy you look at. I’d like to underscore the differentiating point of this strategy versus, say, a broad infrastructure index, because we have a definition of infrastructure expanded from the more traditional approach.
We have three components to our investment strategy. Those are:
- traditional core economic infrastructure
- social infrastructure (something you tend not to see in listed infrastructure funds)
- evolving infrastructure exposure (again this is differentiated)
What’s beneficial about this approach is that it means we can be well diversified across the three categories, which don’t necessarily move in the same way at the same time in various market environments. This gives us that opportunity for capital rotation. On top of this, we’re also diversified by sector, by single stock, by region – because it’s a global strategy. Suddenly that gives you all kinds of opportunity because you never want to be in a situation where everything in your portfolio is similarly correlated, where you won’t get the opportunity to take advantage of capital rotation.
SW: What are your views on inflation – or maybe even the risk of stagflation? With US inflation at a 40 year high and the UK at a 30 year high, what does the huge rise in commodity prices mean for listed infrastructure investment?
AA: Let’s start with inflation which, ultimately, is an increase in the cost of living. The best hedge or protection against that, I would suggest, is to have a growing income. People try to address inflationary cost of living increases by pushing for wage increases. And that is sometimes successful, less successful recently than it would have been in the past when there was more union power.
Other inflation mitigation avenues, of course, are through your investments. This particular fund strategy has a prospectus-enshrined objective to grow the income to the unit holder every year in base currency terms. We aim to do that by investing in companies that offer structural growth opportunities and that can also grow their dividends as a result of growing cash flow and earnings streams, which we then, of course, pass on to investors.
So, if the best protection against inflation and increased cost of living is a growing income, then this is a strategy that seeks to deliver on that solution.
If we get to a stagflation point in the cycle, we’ve got a whole other set of problems. That’s when you start to really worry about asset values generally. But one thing about a stagflation environment is that you can find businesses, as we do, that have a structural, relatively insulated prospect of growing their cash flows, such as in the utility sector or other areas. Of course, you’re always going to be dependent in some way on economic activity across the entire portfolio, but this gives some protection.
Also, it’s an asset allocation which is not just about being defensive, it’s similarly capable of delivering participation to the upside in a rising market – it’s a combination of the two.
SW: To round off our discussion, might you view a recessionary outlook as being relatively beneficial or detrimental to a global listed infrastructure strategy?
AA: In the same way that we talked about stagflation, the recessionary environment, especially if you get an inverted yield curve, tends to be, on a relative basis, beneficial to a strategy like this, given the income generating capability. That’s because in a recession, you’re typically back to real rates being negative, especially if you’ve got a high inflation rate coinciding with that. Negative real rates are quite a strong backdrop for strategies such as this. We don’t want to wish for any of that of course, and we simply don’t know what lies ahead. We certainly don’t want to do well or do better in performance terms for reasons that are so very difficult but must accept that does happen. We all know, we’ve all been through it. Our job is to steer an appropriate path for investors, regardless of whatever market and economic circumstances we face and we’re totally focused on doing just that.
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 strategy can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment
The value and income from a 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 a fund will achieve its objective and you may get back less than you originally invested.
Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast
