The investment in infrastructure has gained relevance in recent years due to its ability to deliver stable and predictable cash flows as well as inflation protection. Clearbridge Investmentsone of Franklin Templeton’s 21 specialty managers, has made a name for itself in this field.
Shane Hurst, member of the fund management team with Rating FundsPeoplehe FTGF ClearBridge Infrastructure Valuerecently shared with FundsPeople their perspectives about current opportunities in the globally listed infrastructure sectorafter a couple of years in which the increase in interest rates made many investors forget about the potential of investing in these assets.
Attractive valuations and dividends
“Infrastructures are essential services, so everyone needs them. They can pass on inflation, as we saw in 2022whether it’s through adjustments in the cost of capital for public service companies or through tolls and fees for highways and airports,” explains the expert.
According to Hurst, Listed infrastructures feature some of the most attractive valuations and dividend prospects seen in a long time: “These stocks have not performed well over the past 12 months, so their valuations are attractive based on our valuation metrics and expectations for future returns. They are also paying exceptional dividends.”
There are several key advantages of exchange-traded funds over private funds, which the manager refers to, such as the liquidity to take advantage of market dislocations, access to higher quality assets and ratings more attractive. He also comments that infrastructure companies “tend to produce very stable returns, whether cash flows or dividends, and are unique assets globally, which are often regulated monopolies or have long-term contracts.”
Current opportunities and key themes
Hurst believes that the current macroeconomic environmentwith bond yields normalizing and central banks lowering interest rates, It is favorable for listed infrastructures. “These stocks have underperformed over the last 12-18 months, so valuations are attractive in our view.”
Furthermore, the manager identifies several structural trends that drive the growth of cash flows in the sector, such as decarbonizationthe increase in electrical demand driven by the AI (with tech companies investing $1 trillion in data centers in the coming years), and the wiring growth to connect and reinforce networks, as well as the replacement of obsolete infrastructure.
As he explains, “if a company spends more on decarbonizing its network, that capital will be incorporated into its regulated asset base and it will obtain a return on that investment, boosting its cash flows, revenues and dividends.”
Regarding AI and the boost in electricity demand growth, Hurst notes that “if you think about the enormous amount of electricity consumed by GPU chips, which use seven to 10 times more electricity than a CPU chip, clearly the increase in demand is understood.”
Geographic positioning with a focus on developed countries
The opportunities exist, not only in the US, but Hurst indicates that they see attractive options in the United Kingdom, France, Italy, Germany and Spain. “We are seeing good opportunities in the US, especially in the utility sector, which is really benefiting from energy demand, driven by AI and further growth in grids.” As for Spain, during the interview several times I use the example of Redeia (global essential infrastructure operator), and I point out that it is a main position in its portfolio, believing that it is a very attractive opportunity.
Regarding emerging markets, Hurst comments that one of the challenges he faces is concerns about corporate governance and regulation. “That is one of the reasons why we currently do not invest in India. Our clients, and we, are concerned about these issues since there is a limitation in being able to capture the risk.” However, the manager contrasts this situation with Brazil, where he indicates that the regulation is more independent and fair, which allows them to invest.
“We currently see better risk-adjusted returns in developed markets compared to emerging markets, with more attractive valuations, better governance and greater ESG commitment,” Husrt points out. This explains why they currently have limited exposure to emerging markets, around 4% of the strategy.
Investment process and stock selection
The fund focuses on investing in utilities (public services) and concessionaires (pay-per-use). While the utilities present a more defensive profile, concessionaires are linked to GDP growth, allowing for greater predictability in future cash flows. Their investment universe includes 600 companies, of which they select the most liquid ones that meet their definition of core infrastructure, reducing this universe to 200 companies and choosing between 35 and 40 of them, with a maximum of 6% per company.
: “Infrastructures are essential services that can shift inflation and produce very stable returns”){kind=link}