Magellan Infrastructure Quarterly Update

(Please find CPD Quiz below)

Key Takeaways

Download Transcript

[00:00:49] Rising interest rates on the infrastructure sector - where are we now in the rate cycle and how is this impacting valuation?

When interest rates rise in response to elevated inflation, infrastructure assets, which inherently provide inflation protection, tend to be resilient as the impact on their earnings is offset by the link to inflation. However, impact arises when interest rates increase more than inflation, particularly if there is a rise in real interest rates (adjusted for inflation). In the first nine months of 2023, there was an increase in both nominal and real interest rates, causing the investment performance of long-duration assets like infrastructure to struggle. Yet, in the last quarter, a decline in real interest rates resulted in a strong performance for infrastructure.

[00:03:11] Is a CPI+5% return goal for infrastructure investments still appropriate?

When considering returns on investments, particularly in infrastructure, it's crucial to distinguish between short-term and long-term perspectives. When we are talking CPI+ 5% for infrastructure investments, we’re talking about long-term returns. Our case for infrastructure, is that we believe you can grow your wealth over time with a high degree of confidence with an expectation of about CPI+5%.

Key Takeaways

[00:05:22] Investment decisions within the infrastructure strategy

One significant change over the past year has been the inclusion of Brookfield Renewables in our investment universe. Traditionally, our concerns with renewables centered around the relatively short average take-or-pay agreements, exposing investors to potential power price risks upon contract repricing. However, Brookfield Renewables, specialising in wind and solar power, stood out due to its longer average contract duration of approximately 15 years. This extended contract durations in Brookfield Renewables meet our infrastructure criteria. We view it as part of the energy infrastructure space, distinct from a utility, where pricing is regulated through contracts, providing an opportunity for growing returns over time.

[00:08:06] The portfolio positioning for 2024

Our current portfolio is comprised of approximately 55% infrastructure and around 45% regulated utilities, with a slight overweight to infrastructure over utilities compared to our long-term expectation of a 50/50 split. The three major sector weights in our portfolio are electric utilities, making up over 30%, toll roads at slightly over 25%, and airports at about 10%. We see electric utilities benefiting significantly from the global transition to net zero, with opportunities arising from increased demand for renewable energy. Toll roads exhibit resilience, with traffic levels bouncing back even after the pandemic-related disruptions. Airports, comprising roughly 10% of our portfolio, have experienced a strong recovery, particularly in North America and Europe, with Asia-Pacific expected to catch up as economies reopen.

Important Information: This material has been produced by Magellan Asset Management Limited trading as MFG Asset Management (‘MFG Asset Management’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision.

This material may include data, research and other information from third party sources. MFG Asset Management makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of MFG Asset Management. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.
Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of MFG Asset Management.