The managers of Marlborough Global Essential Infrastructure hold a portfolio of 25 to 45 high-quality publicly listed companies providing essential infrastructure facilities around the globe.
These are facilities that are essential for the basic functioning of a society, including regulated utilities such as electricity, gas and water; transport facilities, such as toll roads and airports; energy pipelines; and mobile phone towers.
Fund managers Tim Humphreys, Jonathan Reyes, Natasha Thomas and Paul Johnston have more than 60 years' combined experience of investing in infrastructure businesses and their focus on essential infrastructure is a key differentiator. The companies they hold in the fund are typically in regulated industries with long-term contracts and/or have a track record of stable cash flows through the economic cycle. The team's strategy is designed to provide attractive long-term returns, supported by a healthy yield, with superior downside protection and reduced volatility.
The nature of the infrastructure assets involved and the regulation and contracts governing them mean the portfolio is well positioned to deal with higher inflation. Around 95% of the fund is invested in businesses with either explicit or highly implicit inflation protection. Many of the portfolio companies are also benefiting from long-term secular growth trends, such as the global transition from fossil fuels to zero-carbon energy.
The team identify companies with strong ESG credentials and use both quantitative and qualitative analysis, alongside a disciplined risk-management process, with the aim of achieving consistent risk-controlled outperformance.
Positioning
The fund managers believe the long-term outlook for essential infrastructure is very positive and they are fully invested, having taken advantage of the buying opportunity created by recent short-term negative sentiment towards many essential infrastructure companies.
Their base case view on the macroeconomic outlook is that interest rates have peaked or are close to peaking, with a sustained period of elevated inflation expected. In this environment, they believe the healthy yields and strong inflation protection offered by essential infrastructure companies will look highly attractive to investors, providing a supportive backdrop for the asset class.
The listed infrastructure asset class has been under pressure recently, relative to global equities. This is due to real yields (the yield from bonds once inflation is taken into account) rising sharply - putting pressure on long-duration asset valuations. This pullback has, in the view of the fund managers, created an attractive investment opportunity. In their view, share prices have fallen too far, given they expect real yields to stabilise around current levels.
They are seeing many attractive opportunities in the infrastructure sector. For example, in regulated utility companies - particularly those involved in the transition to zero-carbon energy or operating in countries like the UK where share prices are heavily discounted.
In addition, they see interesting opportunities in the mobile phone tower sector, which they believe has been significantly oversold, and the energy infrastructure sector, which they believe is likely to benefit from a stronger growth backdrop in the US.
Key portfolio investment themes
Energy transition: A key theme running through the portfolio, and likely to continue for years to come, is the transition to zero-carbon energy. Much of the capital required to enable countries to achieve net-zero targets will be invested in the infrastructure sector - notably spending on electricity grids and facilities generating renewable energy, as coal and other fossil fuels are retired. The energy transition is expected to gather significant pace in the US, given the transformative nature of the Inflation Reduction Act and the long-term investment certainty it provides. Europe is also rapidly transitioning its energy base - and with still greater urgency after Russia's invasion of Ukraine underlined the importance of energy security.
Inflation protection: The fund maintains high exposure to infrastructure companies that offer strong inflation protection for equity investors, given that inflation is expected to remain elevated in the medium term. Portfolio holdings offering best-in-class inflation protection characteristics include regulated utilities in the UK and Italy, and toll road companies.
Tim Humphreys is a fund manager at Marlborough Global Essential Infrastructure.
