Market review
Global listed infrastructure rallied in December against a brightening economic backdrop and on growing hopes of a business-focussed White House administration in 2017. The best performing infrastructure sector was Towers (+5%), which rallied on renewed demand for their low risk cash flows, supported by barriers to entry, pricing power and structural growth in mobile data. Utilities (+4%) also regained ground on continued investor appetite for stable, income generative assets.Water Utilities (flat) lagged as gains by developed market operators were balanced by the sharp fall in Chile’s Aguas Andinas (-17%, not owned). The company was impacted by a proposed reduction in its minimum guaranteed returns; a reminder of the regulatory risks that infrastructure investors can face.
Europe ex-UK (+6%) was the best performing region. More economically sensitive infrastructure assets such as toll roads and airports were supported by robust volumes and the extension of the ECB’s Quantitative Easing program.
Fund review
The Fund gained 2.8%* during December, 103 basis points behind the FTSE Global Core Infrastructure 50/50 Index (Net TR).
The best performing stock in the Fund was French airport operator Aeroports de Paris (+11%) which rallied on better than expected November passenger growth of 6.2%. Spanish peer AENA (+4%) reported an increase in November passengers of over 10%, as its trend of robust organic growth continued.
Atlantia (+6%), which operates long life concessions on Italy’s network of high quality motorways, announced a share buy-back of up to 5% of the company’s issued capital. Eurotunnel (+9%) climbed on firm November truck shuttle volume growth of 6.8%.
US mobile towers Crown Castle (+5%), SBA Communications (+4%) and American Tower (+4%) gained as concerns about the impact of a potential merger between tower customers Sprint and T-Mobile subsided.
The worst performing stock in the Fund was Hong Kong-listed utility Power Assets Holdings (-8%), which bucked the trend of utilities gains on concerns that it may be involved in the generous bid by its parent company, Cheung Kong Infrastructure, for Australia’s Duet Group.
Chinese toll road operator Jiangsu Expressway (-5%) and Chinese-listed port companies Cosco Shipping Ports (-4%) and China Merchants Ports Holdings (-1%) fell on concerns for the outlook of US interest rates and global trade under a Trump administration.
The Fund built a position in US regulated utility American Electric Power in December. The company has made positive strategic moves in recent years by transitioning away from competitive generation and focussing investment in regulated assets, especially transmission, whilst retaining a strong balance sheet. The company now trades at an unwarranted discount to its peer group.
A position was also initiated in US multi-utility NiSource, which operates regulated gas utilities in seven states in the Midwest and an electric utility in Indiana. Low gas prices and growth in production are stimulating customers to switch to natural gas, which is expected to support earnings growth towards the high end of their 4% to 6% annual EPS growth rate target.
Following strong returns over the past 12 months, Canadian pipeline operator TransCanada was sold on concerns that its current valuation multiple does not adequately reflect the potential execution risk associated with the integration of Columbia Pipeline Group, acquired earlier in 2016.
Outlook
The Fund invests in a range of global listed infrastructure assets including toll roads, airports, ports, railroads, utilities, pipelines and mobile towers. These sectors share common characteristics, like barriers to entry and pricing power that can provide investors with inflation-protected income and strong capital growth over the medium-term.
From here, potential headwinds to the asset class could include higher bond yields, and political or regulatory interference. With this in mind, our Fund’s positioning remains tilted towards growth infrastructure such as the toll road sector, which contains high quality companies generating healthy cash flows and trading at discounts to intrinsic value.
We also favour mobile towers as we believe the market continues to underestimate mobile data growth, and to overestimate potential risks to free cash flows, for these strategically valuable and well-managed infrastructure companies. An underweight exposure has been maintained in interest rate sensitive utilities, especially those with lower earnings growth outlooks.
We see a number of tailwinds for the year ahead, including ongoing structural drivers (like demand for mobile data or renewable energy); and shifting asset allocation from low-yielding bonds and volatile equities towards real assets.
Fund Management, First State Global Listed Infrastructure Fund
* First State Global Listed Infrastructure Securities GBP Class B Accumulation (gross of fees and gross of tax), 1 month return for December 2016, in GBP terms.
