Nick Langley

Despite the calamitous global pandemic situation the outlook for investing in one significant sector, namely infrastructure, is bright, according to Nick Langley, Founder and Senior Portfolio Manager at RARE Infrastructure.

“There is a confluence of issues, events and realities that cause us to be extremely positive about the potential returns on offer from listed infrastructure investments globally as the world grapples with the pandemic and gets ready for the Biden administration in the U.S,” said Mr Langley.

Four positive themes that make investing in infrastructure attractive in 2021 are: acceleration in infrastructure projects globally, Joe Biden’s stance on green energy,  growth in utilities sector and focus on lower emissions target and transport infrastructure,  Langley  noted.

“Across the developed world Infrastructure projects are being accelerated as governments look for opportunities to support local economies, stimulate job markets and support small and medium-sized enterprises. These projects tend to be accretive to value and are often missed by the market.

“We expect to see a further focus on infrastructure spending due to the U.S. presidential election outcome and the probability that Democrats will control the agenda in both houses of Congress (House and Senate). Projects related to renewable power generation and electric vehicles in the utilities sector are expected to benefit, and a larger stimulus bill is now also likely.

“Initiatives to expand broadband to rural areas will likely benefit the wireless-tower sub-sector as will the 5G rollout globally, while ‘midstream’ or traditional energy could face headwinds due to a faster transition toward renewables.

“The utilities sector in the U.S., Europe and Asia were hardly impacted by the pandemic due to their essential service nature, supportive regulation, environmental importance in leading the decarbonisation of economies and  social importance as major employers.

“A variety of trends will likely accelerate asset growth and subsequent earnings, cash flow and dividend growth in the medium and longer-term. These include higher renewable energy targets, gas to electricity switching – in residential as well as commercial, the build-out of electric vehicle charging infrastructure and the need to build grid resilience against increasingly destructive weather events related to climate change.

“We also see opportunities to invest in transport infrastructure, particularly in long-dated monopoly assets like the Eurotunnel and North American Rail, which are expected to benefit from policies to lower emissions and the post-COVID-19 recalibration of supply chains,” Mr Langley said.

“It is indeed remarkable that with so many issues facing governments and institutions, particularly the pandemic-induced health and economic crises, that one sector offers so much potential for investors. We believe we have good cause to be very optimistic about the likely returns from global listed infrastructure in 2021,” he said.

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Nick Langley

The COVID-19 pandemic has meaningfully hit most countries, bringing with it a toll on human lives and livelihoods. As governments move to mitigate the public health crisis and support economies through monetary and fiscal policy, many are asking if governments will stimulate their economies with investments in infrastructure.

Nick Langley, Portfolio Manager, RARE Infrastructure, a leading listed infrastructure manager, says: “While we expect some infrastructure investment as a means of stimulus, we expect it to focus on smaller projects aimed at increasing the money supply and getting money into various smaller communities and regional centers.

“Yet, longer term, there are several positive drivers for infrastructure as an asset class. The need to lower carbon emissions is not going away; nor is the importance of upgrading and building new infrastructure to achieve lower emissions targets.

“And part of the world’s response to the pandemic, increasing the urgency of balancing stakeholders in business operations, also looks to be a positive for infrastructure’s outlook. Partly, this is because infrastructure companies are well-positioned to manage a balance of stakeholder and shareholder interests that is a key tenet of the corporate response to the pandemic.

“The tilt toward managing stakeholder interests has been accentuated by the crisis, as companies have found themselves needing to help employees, customers and the general public during difficult times.

“A specialised knowledge of the infrastructure sector, with a rigorous approach to ESG analysis, will be necessary to manage risks and capitalise on opportunities as green infrastructure grows. The sector has very attractive tailwinds and attributes, but there are several risks that investors need to be mindful of,” notes Langley.

In a recent white paper, Langley highlights:

• Infrastructure will require substantial investments for the world to advance on lower carbon emissions targets and is well-positioned for the growing interest in stakeholder capitalism.
• While public policy will play a significant role in funding lower emission infrastructure, we expect the world will rely on the private sector to fund many initiatives, likely with user-pays and regulated infrastructure.
• We believe it will be advantageous to be in the listed infrastructure space where capital can be allocated nimbly as public policy develops, affecting infrastructure valuations.

Read the white paper.

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The PRI was formed in association with the UN to foster good governance, integrity and accountability in investment globally. It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.

“The movement to increased awareness and adoption of ESG principles in the investment process is one of the most dominant trends in global equity markets today,” said RARE’s Senior Portfolio Manager Shane Hurst.

“Taking account of environment, social and governance factors when assessing companies for the allocation of investment funds is of course desirable from a societal point of view. However, it also aligns with investor interests, as more and more research indicate companies with good adherence to ESG principals are generally higher financial performers than those with poor adherence,” said Hurst.

The PRI 2020 Scorecard for RARE Infrastructure is:

• Strategy and Governance: A
• Listed equity – incorporation: A+
• Listed equity – Active ownership: A

“RARE Infrastructure was established as a specialist global listed infrastructure investment manager in 2006 and was founded on a culture of client focus, research-driven authentic active management and ESG integration. We joined the PRI in 2010.

“ESG and broader sustainability considerations have always been crucial for infrastructure investors. These companies have long balanced the needs of stakeholders and shareholders while the assets themselves play a central role in combating climate change.

“Our investment process has integrated ESG risks and opportunities since day one with the implementation of sustainability evolving continually. The most recent upgrade to RARE’s UNPRI scorecard for Incorporation and Active Ownership recognises our mindset of continuous improvement in this area,” noted Hurst.

RARE aims to deliver long-term inflation-linked capital growth by providing investors access to the risk/return profile of unlisted infrastructure through the listed market.

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“We are bringing scale and efficiency benefits to investors by removing performance fees from the RARE Infrastructure Value Funds, both the ‘Hedged’ and the ‘Unhedged’ variants, effective July 1, 2020,” said Steve Williams, Head of Australian Intermediary Sales at RARE.

The other change to investor expenses involves a reduction in the buy/sell spreads on RARE’s three listed infrastructure funds.

The new spreads for the RARE Infrastructure Income and Value – Hedged and Unhedged Funds are: buy 0.12% / sell 0.05%.  A reduction of 0.08% and 0.10% respectively. While the RARE Emerging Markets Fund has reduced to 0.14% / 0.17%.

“Additionally, we have introduced new sector designations for both Renewables and Energy Infrastructure,” said Williams.

“These changes are designed to enhance the granularity of reporting and to reflect developments and expected growth within the infrastructure asset class. Importantly, these changes do not impact the way RARE constructs its investable universe or its investment processes,” said Williams.

“For Australian investors, it is worth noting that global listed infrastructure stocks can provide an attractive source of income in the current environment and have a low correlation to domestic equities and global bonds. This makes them an ideal vehicle to provide portfolio diversification. Regulation and long-term contracts generally offer stable cash flow and greater capital stability.

“We continue to believe that this is a time when select listed infrastructure can significantly fortify an individual or SMSF portfolio on the basis that certain infrastructure assets can be shown to offer significant downside protection” added Williams.

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Charles Hamieh

The recent fall in the stock market is providing one of the best opportunities to invest in Emerging Markets (EM)  listed infrastructure, notes RARE Infrastructure’s Senior Portfolio Manager, Charles Hamieh.

In a recent investor presentation, Mr Hamieh analyses the thematics in Emerging Markets and the key drivers of EM infrastructure in the COVID-19 environment.

He notes:

• COVID-19 crisis has hit Developed Markets more severely than expected since late March relative to Asia – where most countries have initiated adopting preventive measures earlier as infection spread. Asian EM equity markets have also started pricing in COVID-19-related risks earlier in the year as confirmed cases spiked.
• Invest in EM to capture secular themes underpinned by strong government objectives and agendas, which are unlikely to be derailed by COVID-19 response even if facing any short-term delay.
• Most EM utilities with strong balance sheet positions and defensive cashflows have been sold off together with the market indiscriminately, even with limited risk to commodity price volatility and or volume downside.
• Draconian containment measures in China from late January have quickly brought pandemic under control, to facilitate industrial activity resumption from March; also supporting near-term growth of Asian economies closely linked to China’s supply chain.
• Long-term growth prospect for both utilities and infrastructure is stronger in EM than DM; need for stable and reliable supply of water, electricity, and other essential goods/services has been especially pronounced during recent months of lockdown across countries.

The  RARE Emerging Markets Strategy is  invested in high-quality companies benefiting from structural drivers, with strong cash flow and dividend yields.

Mr Hamieh notes: “We have strong conviction in the long-term opportunities within Emerging Markets listed infrastructure. At the regional level, the Strategy is split between Asia Pacific EM (70%) and Latin America (26%) with the remainder in cash. At the sector level, the Strategy is split between economically sensitive user-pay assets (36%) and regulated utilities (60%).”

Read the detailed presentation.

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Nick Langley

The current outbreak of a new virus, COVID-19, has understandably spooked markets, investors and governments.

According to Nick Langley, Co-Founder and Senior Portfolio Manager at RARE Infrastructure, in any time of market turmoil it’s inevitable that investors and financial advisors turn to defensive strategies.

He says: “Investors should prepare for negative events through a well-structured portfolio containing defensive assets. Whether it be the dot com bubble burst, GFC, or a global health crisis such as COVID-19, past and current crises have shown the importance of being defensive.”

Investor portfolios should always contain some level of defence that can be dialled up or down as appropriate for the investor’s objectives or market conditions.

“An ideal ‘defence’ investment is one whose value is to some extent insulated from the full force of a market downturn but will experience a reasonable percentage of the upside when the market moves in a positive direction,” says Langley.

“Fixed interest and cash are generally regarded as the default defensive asset classes but another is listed infrastructure, which is RARE’s singular speciality.

“Within this asset class, we favour regulated assets such as water and energy distribution – poles, wires and gas pipelines – which have high income but low exposure to fluctuations in GDP. These defensive ‘defence’ investments can be mixed with user-pay assets which generally have concession-based contracts with toll roads, rail, ports and airports but typically have lower income returns and are relatively higher leveraged to GDP.

“For Australian investors it is worth noting that global listed Infrastructure stocks have a low correlation to the AUD, domestic equities and global bonds, which makes them an ideal vehicle to provide portfolio diversification. Regulation and long-term contracts generally offer stable cash flow and greater capital stability.

“For instance, since 2010 the RARE Income Strategy has seen a 65% upside capture of monthly gains made by the MSCI AC World Index while bearing only 26% of any overall monthly losses of the same index.

“We believe this performance history would meet most investors criteria for a defensive asset,” Langley notes.

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RARE Senior Portfolio Manager Charles Hamieh said the decelerating global growth of 2018/19 could be seen as a late- cycle pause rather than a precursor to recession.

“We think the market has been too pessimistic for growth prospects in 2020,” Mr Hamieh said.

“As the likelihood of recession diminished we saw a cycling from defensive stocks to growth and value and we expect this trend to continue at least till mid-2020.

“Lower inflation and lower interest rates could lead to a further expansion of earnings multiples for equities including listed infrastructure.

“There is now a general acceptance that monetary policy has become less effective and that central banks don’t have the levers to offset a large downturn.

“Political uncertainty and a shift to nationalistic policies has created uncertainty for corporates and delayed investment decisions.

“Luckily, infrastructure has been spared this scepticism as regulators continue to approve projects, driving near record asset base growth and giving certainty to future earnings growth across the sector.

“One of the key drivers for infrastructure is likely to be the increasing focus on ESG principles  (Environmental Social and Governance) and we predict the US election will likely see ‘green’ infrastructure programs gain momentum.

“Global initiatives to reduce carbon emissions are resulting in local actions to support the further development of renewable energy and the drive toward greater electrification.

“Governments are setting targets for electricity sourced from renewable energy – EU 32% by 2030, California 60% by 2030, Virginia 0% carbon by 2050 – and the Bloomberg New Energy Finance researchers expect 80% of new capacity growth through 2050 will come from renewables.

“Meanwhile, significant capital is being spent to mitigate the effects of climate change and adapt networks and infrastructure to cope with more volatile climatic events, such as ice storms and wildfires.

“There is a movement to increase the efficiency of infrastructure, for example through the development of electricity storage, and in the reduction of wastage, such as from leaking pipes in water networks.

“All this is driving near-record rate base growth across the sector thus presenting and increasing quantum of investment opportunities,” said Mr Hamieh.

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“Both our global listed infrastructure Value and Income Funds showed enhanced performance during October against a backdrop of positive equity markets,” said RARE Senior Portfolio Manager Shane Hurst.

“Although the yield curve in the US has moved away from an inversion path in recent weeks, we continue to believe that defensive strategies are a prudent course for investors and that listed infrastructure presents opportunities for investors looking to preserve and grow capital at the same time as looking for downside protection.

“Uncertainty has become more pronounced in recent times as the global economy has slowed.

“Global manufacturing weakness, low inflation, low economic growth and geopolitical tension has the world on edge.

“However, while there is plenty to worry about, global equities are still an engaging proposition as it is unlikely that the US economy, with record low unemployment, will dip into recession any time soon.

“Central banks are once again providing monetary stimulus, and fiscal stimulus is starting to come through.

“Retreating to cash or bonds runs the risk of missing out on potentially meaningful returns over the next year.

“In this environment, we believe investing in global listed infrastructure allows investors to navigate market volatility while remaining invested in equities. Infrastructure companies, when selected appropriately, can provide excellent visibility over revenues and dividends driven by stable earnings of the underlying assets, regulation and long-term contracts.

“A maturing business cycle means that quality assets that deliver growing earnings will be sought after and attract more capital as investors become more defensively positioned. As demonstrated by the chart below, listed infrastructure provides downside mitigation while participating on the upside. Investors can also see that a shallower drawdown leads to an earlier recovery.

“This downside mitigation can, over the long term, translate into a strategy that provides superior risk,” Mr Hurst said.

UK water sparkles in October for RARE

For both the RARE Infrastructure Income portfolio and the RARE Infrastructure Value portfolio Western Europe was a top performer in terms of regions in October. United Utilities, the largest listed water company in the UK, was a lead performer in both portfolios. United Utilities manages the regulated water and wastewater network in northwest England operating under a license with indefinite length.

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Nick Langley

The US Federal Reserve’s latest 25 basis points rate reduction in mid-September is seen by many market observers as another signal that world markets are in, or are fast approaching, a late cycle, according to Australian based global listed infrastructure specialist RARE Infrastructure.

“US-China trade tensions, Brexit, Hong Kong protests and anaemic growth in the Euro Zone where quantitative easing is again on the front burner, are all issues that contribute to global uncertainty and the late-cycle narrative,” said RARE  Co-Founder and Senior Portfolio Manager Nick Langley.

“On the interest rate front, the Fed felt the need to drop rates again in September, only a month after its  first reduction since December 2015. Looking at global equities, now is just the third time in the past 100 years in the U.S. that equity valuations have been this high (if you consider Shiller CAPE for the S&P 500.) These are two strong arguments for a late-cycle view.

“A late-cycle consensus raises a critical question for investors: how should I manage this situation?

“We believe this is a time when select listed infrastructure can significantly fortify an individual or SMSF portfolio on the basis that certain infrastructure assets can be shown to offer significant downside protection while capturing much of the upside.

“The RARE Income Strategy has demonstrated such defensive qualities since its inception in 2010. In falling markets the Strategy has exhibited a beta of .24, meaning when  markets fall 100 points the fund falls just 24 points on average. Whilst in rising markets, the Strategy has exhibited a beta of .66, meaning for a 100 point rise in the market, the fund typically rises by 66 basis points.

“The RARE Infrastructure Income Fund has only recently become available on most retail platforms  in Australia. It is our most defensive strategy and is experiencing significant inflows globally and locally.  This tells us that investors are indeed reacting to global uncertainty and looking to products that can provide more reliable income in this environment.

“Within this Strategy, we are biased towards the utility sector because utilities’ earnings are generally the most resilient in times of economic stress. This is because they are underpinned by regulation and/or long-term contracts and are generally linked to inflation.

“For example, the Income Fund’s single largest holding (5.7%) is Canadian headquartered Enbridge Inc, a North American pipeline business, of which 98% of its EBITDA is from regulated take-or-pay or fixed-fee contracts. This is by far the highest proportion in its class.

“Another holding (4.1%) is the UK water utility, United Utilities, which we consider as best in class and which we believe is likely to benefit from the UK regulator’s policy of rewarding well-run enterprises with the ability to generate greater revenue streams.

“In assessing potential investments, RARE determines whether a business has the ability to earn excess returns, comparative to its peers, and then makes a judgement on the quality or sustainability of the yield.

“Both businesses passed these hurdles, which we are confident will allow the Fund to continue to meet its target yield through the economic cycle of 5% p.a. and a total return of CPI plus 5.5% p.a.” Mr Langley said.

The Fund currently has five Australian holdings: Sydney Airport, Transurban, APA Group, AusNet and Spark Infrastructure.

The RARE Income Strategy portfolio has a total capitalisation of $26.3 billion, a projected gross dividend yield of 5.5% p.a. and an estimated dividend per share (DPS) estimated growth of 4.7% p.a.

Chart of the top ten holdings as at 31 August 2019: 

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The list now comprises:

• BT Wrap
• Panorama
• Asgard
• Xplore Wealth
• Hub24
• Netwealth
• Powerwrap
• Praemium

As at 30 June, 2019 units in the RARE Infrastructure Fund (Class A) recorded an average income distribution of 6.8% p.a. and a total return of 10.8 % p.a over 3 years.

This performance exceeds the fund’s performance benchmark, the G7 OECD Inflation index +5.5%, by 3.4% p.a.

RARE Portfolio Manager, Shane Hurst said: “The investment objective of the Income Fund is to provide investors with a regular and stable income of 5%+ p.a. through an investment cycle comprised of dividends, distributions and interest, plus capital growth from a portfolio of global listed infrastructure securities.

There is growing consensus that we are in the late stages of the economic cycle, as increasing market volatility, lower economic growth, and greater uncertainty becomes more pronounced. The Reserve Bank’s recent cuts to official interest rates is evidence of this.

The Fund is ideally suited to this environment because the infrastructure companies RARE invests in provide more predictable cash flows, even during periods of market slowdown or recession.

The Fund’s current holdings are diversified across regions and infrastructure sectors with electricity the largest single sector, making up 50% of the portfolio and the USA and Canada the single largest region at 37%”.

This fund is “Recommended” By both Lonsec and Zenith and rated “Superior” by SQM Research.

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