Nick Langley

Infrastructure sector has the opportunity to lead global industry in decarbonisation and the transition to net-zero emissions, an extensive sector review by leading investment manager ClearBridge Investments has found.

ClearBridge Investments has published a white paper that explores changes in a number of infrastructure sectors, including electric utilities, energy infrastructure, airports and rail transport. The paper focuses on what is likely to happen over the next few years and beyond.

Nick Langley, ClearBridge Investments Managing Director and Portfolio Manager, says: “While moving toward net-zero is difficult, several pathways exist for infrastructure to lead. Each of these will require significant investment.

“Infrastructure companies and asset owners have historically been reducing carbon emissions from their assets, and this trend is set to accelerate as global policy support and social pressures grow.”

The white paper, Infrastructure and the Move Toward Net-Zero, says railroads are one of the likely ESG winners in the transport industry, due to their unique ability to reduce greenhouse gas emissions. Rails are, on average, four times more fuel-efficient than trucks, producing up to 75% fewer emissions.

There has been a substantial shift in thinking in the sector over the past few years, with railroads setting emissions reductions targets. Those targets have become increasingly ambitious, and the industry is adopting practices that dramatically improve the efficiency of diesel locomotives.

Businesses are also showing more willingness to shift from trucks to rail in order to reduce their carbon footprint.

In another transport sector, aviation, airports produce low emissions levels compared with other parts of the transport industry. To lower emissions further, airport operators seek to procure renewable energy and install solar panels on their sites.

A more challenging task is to cut indirect emissions, such as reducing unnecessary airline engine operation, emissions from ground support equipment and passenger travel to the airport. Airports are adopting Airport Collaborative Decision Making (A-CDM) to improve airspace and airfield efficiency.

In the electric utility sector, since the Paris Climate Agreement in 2016 most companies have put emissions targets in place and are pivoting from fossil-fueled generation to renewables. As a result, annual renewables generation capacity has doubled worldwide over the past decade, while utilities have been decommissioning thermal and nuclear plants.

In China alone, coal-fired capacity to total capacity has come down from 67% in 2010 to 49% in 2020.

Power transmission and distribution networks are investing heavily to improve reliability and reduce “grid curtailment” of wind and solar (deliberate reduction in output to balance supply).

Energy infrastructure consists primarily of large oil and gas pipelines. The gas pipeline sector has been a significant contributor to the reduction in greenhouse gas emissions in the electricity sector because gas contributes around half the CO2 emissions of coal and has been replacing it as a fuel to generate electricity.

This trend has slowed as renewable energy approaches price parity with fossil fuels. As a result, gas has moved from being a solution to being a target to reduce emissions.

Langley says the trends are positive, but all these sectors face challenges, which must be weighed against the opportunities as investors make their calls.

“The oil and gas sectors face greater challenges than other infrastructure sectors,” Langley says.

“Companies are transitioning away from gas, with some piloting hydrogen and renewable gas, while others invest in wind and other renewables. We are sceptical about the ability of all pipeline companies to benefit from the transition to net-zero emissions. In addition, the development of the electric vehicle market is threatening the future of oil.”

According to the white paper, challenges facing the electric utility sector include maintaining stable grids, the expiry of subsidy support and increased competition as barriers to entry come down.

The biggest challenge facing rail is the threat that regulators, responding to shippers’ complaints, will slow the pace of change.

Airports have a complex array of stakeholders, including state, federal and local governments that need to be taken along the net-zero journey.

The post Infrastructure to play a key role in the move to net-zero emissions appeared first on AdviserVoice.

Nick Langley

In its midyear outlook, Franklin Templeton, a global investment manager,  presents market and investment views for the second half of the year and examine the uneven global recovery from COVID-19.

Emerging COVID-19 variants are adding new economic headwinds in parts of the world, while other countries are sharply rebounding amid vaccination rollouts and heavy fiscal and monetary support. Combining this backdrop with supply chain frictions leads to an intriguing second half of 2021.

This latest outlook highlights some of Franklin Templeton’s specialist investment managers across the globe and across asset classes.

Key views across the asset categories include:

• The remainder of 2021 will likely prove challenging with potential key themes of guarding for inflation, searching for income, seeking quality companies as well as looking beyond stocks and bonds.
• Fixed income activity cannot avoid looking out for inflation and income. The opportunities across corporate credit markets will be selective and uneven, and we believe active management will be important. Investors should consider sector, duration and quality rotation.
• Equity discussions converge on “quality” with investors across styles and market capitalization ranges believing the “junk trade” is over and quality is the priority beyond structured definitions of growth and value. Different managers offer different definitions of quality companies, helping investors navigate the market while analyzing supply chain disruptions, economic cycles and growth.
• Real estate takes us directly to the impacts of inflation. The straightforward mechanism of raising rents under improving economic conditions allows properties to adapt to economic supply and demand. This mechanism makes commercial real estate particularly interesting in the second half of this year.
• Infrastructure has regional catalysts and a big nod to sustainable investing and environmental, social and governance (ESG). Significant initiatives around the world are driven from social and government motivations that will allow infrastructure to have diversification benefits beyond the value of the investment. These benefits will be longer term than the second half of 2021.

The Investment Managers note:

Inflation drives need for active fixed income

Brian Kloss, JD, CPA, Brandywine Global: We expect the remainder of 2021 will be challenging. Returns will be harder to come by, but should still be positive, in our view. Overall, we are constructive on corporate credit, especially the shorter end of the curve. Pro-cyclical sectors, such as commodities, basic materials and health care technology, provide interesting opportunities. We believe active management will be key, as the opportunities across corporate credit markets will be selective and uneven. Investors will need to use all the tools in their toolkits, including sector, duration and quality rotation.

Nicholas Hardingham, CFA, Franklin Templeton Fixed Income: We maintain our bullish view on emerging market debt as an asset class and favor hard-currency emerging markets over local-currency emerging markets, with most of the local rates still trading at historic lows and real rates either negative or extremely low. With interest rates expected to rise in 2022, we do not see the value in adding longer-duration holdings without attractive levels of spread to compensate, and therefore retain our bias for high-yield versus investment-grade issuers.

Quality, quality, quality remains central to equities

Jonathan Curtis, Franklin Equity Group: Recent volatility aside, we believe technology enjoys powerful secular and cyclical tailwinds which are positive for the long term and near term. We believe the sector is likely to grow much faster than inflation, has pricing power (owing to its leverage to productivity), is asset light and will enjoy deflationary tailwinds as knowledge workers take advantage of more flexible work arrangements to relocate to lower-cost regions.

Alan Bartlett, Templeton Global Equity Group: Our idea of “compound value” is rooted in the belief that value arises from the union of multiple elements, which can include price, quality, growth and changes/ events through time. Looking across the globe, we currently like European equities, as the eurozone is one of cheapest global regions and home to leading industrials and consumer companies with upside to reopening and post-pandemic recovery. We also find Japan attractive, as companies are restructuring and improving balance sheets, and driving a focus to improve return on equity.

Zehrid Osmani, Martin Currie: We focus on specific stock characteristics rather than regional assessments, but at the geographic level, we happen to find more upside potential in equities in Europe and emerging markets rather than in the US equity market. In terms of sectors, US President Joe Biden’s infrastructure spending program has the potential to significantly boost the economic momentum in the United States, thus potentially shaping a long positive industrial cycle with positive implications both for the US and global economic outlook.

Manraj Sekhon, CFA, Franklin Templeton Emerging Markets Equity: Emerging market (EM) equities have continued their ascent so far this year, though the pace has moderated from the momentum of 2020. EMs in general have shown sustained resilience in managing and adapting to COVID-19. It’s worth noting the growing divergence between the perceived challenges surrounding these markets and their demonstrated structural strengths. We highlight three key areas that warrant attention— demand, sentiment and inflation.

ESG and inflation may benefit alternatives

Tim Wang, Ph.D., Clarion Partners: We believe 2021 marks the beginning of a new real estate market cycle. As demand continues to recover across most markets and property sectors, rising occupancy and higher effective rents should drive higher net operating income, supporting higher dividend and property appreciation. In our view, we believe that real estate—income with growth—ought to be an important part of portfolio allocation strategy given accelerating economic growth and the reflationary environment.

Nick Langley, ClearBridge Investments: Investors should benefit from global stimulus plans as policymakers agree on aggressive multi-decade carbon reduction targets. This investment will allow infrastructure and utility assets to earn stable and often regulated returns, off capital deployed into such areas as lower-carbon generation, strengthening of electricity grids and lower-carbon fuels such as hydrogen. While there are nuances to how environmental, social and governance efforts will influence different areas of infrastructure, we believe it will pay to have some tactical ability.

The post Midyear outlook: guarding for inflation and searching for quality appeared first on AdviserVoice.

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.

The post 2021 outlook bright for investing in infrastructure appeared first on AdviserVoice.

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.

The post The push for sustainable infrastructure grows appeared first on AdviserVoice.

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.

The post Defensive assets centre stage in times of turmoil appeared first on AdviserVoice.

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: 

The post ‘Late Cycle’ strategy can provide income from infrastructure: RARE appeared first on AdviserVoice.

Where are the US opportunities for growth?

Notes from RARE Infrastructure

More spend on airports, roads, rail and water is likely to flow from the Trump Administration’s infrastructure reform. The acquisition of publicly owned assets by listed infrastructure companies is another potential outcome.

The White House’s ‘Legislated Outline for Rebuilding Infrastructure in America’ is part of the Budget proposal for the fiscal year from October 1 2018 – September 30 2019.

The White House is seeking long-term reform in how projects are regulated, funded, delivered and maintained. President Donald Trump also wants Congress to approve a $200 billion federally funded investment to leverage at least $1.5 trillion in infrastructure investment. The breakdown^[1] of this planned $200 billion spend covers:

• $100 billion Incentive Program to ‘encourage State, local, and private investment by awarding project sponsors incentives for demonstrating innovative approaches that will generate independent revenue, reduce project costs and timelines, and improve performance’.
• $50 billion Rural Infrastructure Program to ‘enable rural America to address its unique infrastructure challenges, rebuilding and modernising bridges, roads, water and wastewater assets, water resources, waterways, power generation assets and broadband.’
• $20 billion Transformative Projects Program to ‘spur competition around bold, innovative, and truly transformative projects that could dramatically improve future infrastructure, become self-sustaining without Federal support, and have a significant impact on the Nation, a region, State or metropolitan area.’
• $20 billion Finance Programs ‘to address a broader range of infrastructure needs, giving State and local governments increased opportunity to finance large-scale infrastructure projects under terms that are more advantageous than in the financial market.’
• $10 billion Federal Capital Revolving Fund. ‘The proposal is to establish a mandatory revolving fund to finance purchases, construction or renovation of federally owned domestic civilian real property.’

These funding programs subsidise some of the design, construction or financing costs associated with developing infrastructure projects. As such, if this proposed budget is approved and the planned spend comes to fruition, certain segments of the listed infrastructure market that have ‘shovel-ready’ projects are well positioned to take advantage of the above-mentioned programs.

The plan also spells out how Trump Administration endeavours to fix underlying incentives, procedures, and policies to spur better and quicker infrastructure decisions and outcomes, across a range of sectors, namely rail, airports, water and social infrastructure.

We expect the proposed incentives will attract global capital and expertise to the US market, particularly within the toll road and airport segment which includes many operators that have been active in the US over the last decade.

These operators will bring experience in successfully developing and executing similar projects around the world and have the skill sets required to deliver these projects on time and on budget. Within the toll road sector, for instance, Spanish infrastructure operator Ferrovial and Australian toll road operator Transurban, have proven experience in successfully building and operating US toll roads.

By Nick Langley, Co-Chief Executive Officer, Co-Chief Investment Officer, and Portfolio Manager and Richard Elmslie, Co-Chief Executive Officer, Co-Chief Investment Officer and Portfolio Manager

[1] ‘Legislative Outline for Rebuilding Infrastructure in America’, The White House. https://www.whitehouse.gov/wp-content/uploads/2018/02/INFRASTRUCTURE-211.pdf Note, all currency references are USD denominated.

The post Rebuilding American infrastructure: opportunities for growth appeared first on AdviserVoice.

Disruptors could appear within the infrastructure sector.

RARE Infrastructure, the Sydney based investment manager specialising in global listed infrastructure believes 2018 should be a relatively benign year for the sector.

“We are expecting a stable operating environment but recognise that any deviation from expectations could cause an outsized movement in asset prices, said Nick Langley, Co- CEO, Co-CIO Rare Infrastructure.

“While there may be volatility, RARE does not expect any major corrections, as there is still significant cash on the sidelines waiting to ‘buy the dips’.

“In short, we expect continued growth in usage/patronage for infrastructure companies but expect pressure on achieved prices, impacting revenues.

“As long as we continue to see strong underlying economic growth we will continue to see an increase in revenue and cash flow growth, which is supportive of earnings and dividend growth.

“While RARE is fully invested, in 2017 we increased the defensive positioning of strategies.

“We are seeking a balance between the more defensive regulated utility companies with higher growth infrastructure companies, such as rail companies, toll roads and airports.

“We predict that three key themes will drive the infrastructure market in 2018.

First is asset based growth- companies investing in their underlying assets to generate future returns, rather than buying or building new assets.

Most of the companies RARE invests in are achieving between 7% and 10% return on equity which in turn is being invested into the company’s existing assets.

Second is price elasticity of demand. We believe that, as companies need to be careful not to increase prices beyond the consumer’s willingness to pay. For instance Toll roads that increase rates beyond a certain level can quickly find revenues impacted by motorists taking alternative routes.

“Third and arguably the theme with the greatest potential to change markets is technological disruption. Investors are starting to consider, and be wary of, the impacts of changes in technology on the way we utilise our infrastructure, and there may be some winners and losers out of that.

“Some examples of disruptors within the infrastructure sector include: the falling cost of battery energy storage, greater penetration of renewable power generation, increased inter-connection of electricity networks, and the greater prevalence of electric vehicles, “ said Nick Langley.

The post Macroeconomic outlook benign for Infrastructure… but beware technological disruption appeared first on AdviserVoice.