For investment professionals only Listed infrastructure: essential assets for the modern age Alex Araujo , Fund Manager January 2018
Learning objectives Listed infrastructure: essential assets for the modern age • Learn about listed infrastructure, its evolving nature and the benefits it can bring to investors’ portfolios • Grasp the differences between the active and passive routes to investing in listed infrastructure • Comprehend the risks associated with investments in this asset class 2
Listed infrastructure The foundation of the industrialised world Equity markets have financed infrastructure for over a century Image source: By Unbekannte Autoren und Grafiker; Scan von Auktionshaus Vladimir Gutowski - http://www.gutowski.de/Katalog-58/Katalogbilder/797.jpg, 3 Public Domain, https://commons.wikimedia.org/w/index.php?curid=50944680
Infrastructure An essential part of your day 12 11 1 2 10 9 3 8 4 7 5 6 z 4
Agenda Listed infrastructure: essential assets for the modern age Why How What do we think about are the risk listed infrastructure? listed infrastructure? considerations? 5
1. Why listed infrastructure? A diversifier for Warren Buffett and Bill Gates “Recession-resistant earnings which result from these companies offering an essential service for which demand is remarkably steady” Warren Buffett Cascade Berkshire Investment Hathaway Quote source: Letter to Berkshire Hathaway shareholders, 25 February 2017; Image sources: By DFID - UK Department for International Development - https://www.flickr.com/photos/dfid/19111683745/, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=41202006, By 6 Augy8400 - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=42102073, By en:user:Myke2020 - http://en.wikipedia.org/wiki/Image:Cntrain7331.JPG, Public Domain, https://commons.wikimedia.org/w/index.php?curid=3355874, By Nixdorf, CC BY-SA 3.0, By Rose and Trev Clough, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=12965176
1. Why listed infrastructure? Diversification benefits – the evidence Infrastructure universe vs MSCI AC World (5 years)* 12 12 10 Higher allocation to our Volatility % Return % 8 11 infrastructure universe 6 enhances return, while 4 10 2 reducing risk… 0 9 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Increased allocation to listed infrastructure Infrastructure universe vs MSCI AC World (10 years)* Return (LHS) Risk (RHS) 12 20 10 Volatility % Return % 8 18 … and the longer the holding 6 period, the more pronounced 4 16 2 the effect 0 14 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Increased allocation to listed infrastructure Return (LHS) Risk (RHS) Past performance is not a guide to future performance 7 Source: M&G, PCR team, 25 August 2017 *As defined by M&G Investments
1. Why listed infrastructure? Higher yield and lower volatility/drawdown vs global equities Yield: Infrastructure universe vs MSCI AC World ϯ Beta: Infrastructure universe rel. to MSCI AC World* 8% 1.2 1 7% 0.8 0.6 6% Beta to MSCI AC World MSCI AC World Index 0.4 5% 4% Drawdown (in USD)** 0.0 3% -0.1 -0.2 2% -0.3 -0.4 1% -0.5 Infra Universe MSCI AC World -0.6 Infra Universe MSCI AC World 0% -0.7 Past performance is not a guide to future performance Source: Factset, 30 June 2017 . *As at 31 January 2017. **As at 27 October 2017 ϯ As defined by M&G Investments 8
2. How do we think about listed infrastructure? M&G Income team philosophy: focus on dividend growth 30 25 20 Dividend (pence) 15 10 5 0 Dividend (stock yielding 6%, no growth) Dividend (stock yielding 4%, 10% growth) The power of long-term compounding 9 Source: M&G, 2017. Illustrative figures only
2. How do we think about listed infrastructure? Essential assets for the functioning of global society Investing in businesses owning or controlling: • Critical infrastructure • Long-life concessions • Perpetual royalties Strategic assets with physical backing and long-term growth Source: M&G, 2017 10
2. How do we think about listed infrastructure? Expanding the universe to capture long-term growth Infrastructure class Economic (65-75%) Social (10-20%) Evolving (15-25%) Utility Energy Transport Communication Transactional Royalty Health Education Security sub-industry Industry & Electricity Pipelines Toll roads Towers Payments Energy Hospitals Schools Prisons Natural gas Terminals Railways Data centres Exchanges Mineral Renewables LNG Airports State care Universities Optical networks Water Ports Student housing Waste Public transit Satellite Dividend profile* Past performance is not a guide to future performance A stable, dependable foundation…..augmented by growth 11 Source: M&G, October 2017 *Expected annual dividend increase, for illustrative purposes only
2. How do we think about listed infrastructure? Economic infrastructure: Ferrovial Standard toll road UK airports 407ETR, Toronto LBJ Expressway, Texas Managed lanes World-class assets, long-term growth, and innovation 12 Source: Company website, 30 June 2017
2. How do we think about listed infrastructure? Evolving infrastructure: Equinix Big data IP traffic Connected devices eCommerce Data storage Cloud services Strategic assets connecting an increasingly digital world 13 Source: Company website, 30 June 2017
2. How do we think about listed infrastructure? An opportunity set with depth and liquidity Investible universe 250+ (number of companies) Average market cap $13 billion (USD) Combined market cap $3+ trillion (USD) A scalable strategy with a diverse range of business models 14 Source: M&G, 5 October 2017
2. How do we think about listed infrastructure? Multiple sources of growth Inflation-Linked Cash Flows Greenfield Emerging Markets Investment Opportunities Structural Growth: Communications Brownfield Payments Investment Renewables Opportunities Airports 15 Source: M&G, October 2017
2. How do we think about listed infrastructure? An active approach is essential: infrastructure indices are flawed Infrastructure index Constituents Utilities Energy Telecom services Transport FTSE Core Infrastructure 149 56% 11% 1% 25% FTSE Core Infrastructure 227 11% 1% 48% 32% 50/50 S&P Global Infrastructure 75 0% 39% 18% 43% MSCI ACWI Infrastructure 262 9% 4% 41% 42% Macquarie Global 241 80% 12% 0% 7% Infrastructure Highly concentrated with bond-proxy performance Source: Provider factsheets, 31 August 2017 16
3. What are the risk considerations? Regulation “It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects” Warren Buffett Benevolent Cautious 17 Source: M&G, October 2017. Quote from Letter to Berkshire Hathaway shareholders, 25 February 2017
3. What are the risk considerations? Environmental, social and governance issues Infrastructure assets require: Close examination of Rigorous framework to business assess long-term financial impact sustainability Strict limits applied to: Coal-fired power Nuclear power ESG analysis is integrated in the investment process for economic reasons 18 Source: M&G, October 2017
3. What are the risk considerations? Rising interest rates Effect of +100 basis point shift on investible universe, propagated (%) Performance impact (% points) 6% 4% 2% 0% -2% -4% Economic Social Evolving -6% ‘Evolving’ bucket is an effective diversifier 19 Source: M&G PCR team, Bloomberg Global Factor Model, 31 October 2016
Learning objectives Listed infrastructure: essential assets for the modern age • Learn about listed infrastructure, its evolving nature and the benefits it can bring to investors’ portfolios • Grasp the differences between the active and passive routes to investing in listed infrastructure • Comprehend the risks associated with investments in this asset class 20
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