Equity markets saw a sharp bounce in the final quarter of 2020, with global equities (in USD terms) up 13.96%. Listed infrastructure also saw positive performance, with the FTSE Global Core Infrastructure 50/50 Index (USD) up 8.47%.
On the back of several positive vaccine announcements, the transportation infrastructure subsector had a very strong quarter. Toll-roads and airports rebounded strongly from earlier weakness as investors welcomed the prospect of a return to travel on roads and across international borders.
Regulated utilities benefitted less from the positive vaccine news and lagged the broader sector. We continue to view these companies favourably due to their stable earnings, long-term investment opportunities and attractive valuations. This year we have increased our exposure to regulated electric utilities, as the push increases globally for greater electrification and decarbonisation of electricity generation, which we believe will provide long-dated investment opportunities.
Related to this we have just completed a White Paper titled “The Impacts of the Energy Transition on the Infrastructure Needs in the US”. The paper considers the key climate change factors that are driving energy investments in the US, and the ability for these investments to be made whilst balancing energy reliability, security and affordability. Our conclusion is that US electric utilities are well-positioned to benefit from the energy transition, whilst the outlook for US gas utilities is more uncertain. We have attached a copy of the White Paper with this quarterly letter.
To conclude, 2020 has been a tough year for the listed infrastructure sector, and especially relative to global equities. Some of this relative performance reflects the specific impact that COVID-19 has had on assets such as airports and tollroads. But otherwise, the earnings of the sector have generally seen minimal impact from COVID and in a number of cases the investment opportunities for these companies has strengthened. In addition, we continue to believe that there will be strong ongoing demand for long-dated, stable income streams by various investor types, and this is being reflected in the prices being paid by direct infrastructure investors for comparable assets. For all these reasons we remain positive around valuations in the listed infrastructure sector.
At 31 December our Global Listed Infrastructure strategy held 32 high quality infrastructure securities across 11 countries.
The largest individual country exposure remains the United States of America at 51%, which had increased over the quarter. The United Kingdom (12%) was our next largest, followed by France (9%), which had both decreased over the quarter.
From a sector perspective, our largest holdings continue to be in regulated assets (56%), which decreased during the quarter as we had trimmed some regulated utilities that had recently outperformed. Our holdings of contracted assets were unchanged at 20%, whilst our transportation concessions (such as airport and toll-road assets) increased to 22%.
The investment team are continually looking on a bottom-up basis for further attractive investment opportunities to add to the portfolio. This we expect will result in a fairly low level of portfolio turnover, as individual stocks fluctuate between being over-sold or over-bought.
Performance contribution (USD)
|Best contributing stocks||%||Worst contributing stocks||%|
|Fraport||1.04||Crown Castle Intl Corp||-0.28|
|Flughafen Zuerich||0.72||Ameren Corporation||-0.25|
|Edison International||0.59||Entergy Corp||-0.23|
|Ferrovial SA||Atmos Energy Corp|
|Crown Castle Intl Corp||Transmissora Al. de Energia Elet.|
|Ameren Corporation||TC Energy Corp|
|American Electric Power||Hydro One|
Top ten holdings
|Duke Energy Corp||6.05|
|American Electric Power||4.62|
|Crown Castle Intl Corp||4.49|
Analysis of portfolio
|Number of Stocks||32|
|Dividend Yield (%)||3.7|
|Gearing (net debt/EBITDA)(x)||5.2|
*Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortisation
These figures are based on estimates for the next twelve months which include assumptions that may not hold true. Actual outcomes may differ. Source: Maple-Brown Abbott Ltd internal estimates, Sentieo, and Bloomberg.
The country and sector weightings
Selected infrastructure news items
- During the quarter, strategy holding Enbridge Inc. received the final Federal and State permits and approvals required to commence construction of the US portion of the Line 3 Replacement (L3R) Project. The L3R project is a $2.9 billion safety- and maintenance-driven replacement project expected to transport 760,000 barrels per day of crude oil along 1,031 miles of pipeline from Edmonton, Alberta to Superior, Wisconsin. Enbridge commenced construction on the project on 27 November, and expects an in-service date in the fourth quarter of 2021.
- Strategy holding Sempra Energy announced a series of transactions intended to simplify its non-utility energy infrastructure investments under one platform and highlight value across the company. The series of transactions includes a stock-for-stock exchange offer for IEnova stock not owned by Sempra, and the formation of Sempra Infrastructure Partners (SIP) –comprising of Sempra LNG and IEnova. Sempra has already initiated a process to sell a non-controlling interest in SIP, which is expected to close by the end of March 2021. Sempra and IEnova had also announced during the quarter that it had reached a final investment decision on the ECA Liquefaction joint venture which is a $2 billion, 3 million tons per year LNG export facility located in Baja California.
- On 10 December, the Intergovernmental Commission (IGC) agreed to the ElecLink cable pull through the Channel Tunnel. This follows the authorisation in October by the IGC to carry out connection tests between the converter stations and the high voltage national networks. The ElecLink is a 1000MW electrical interconnector between the UK and France that runs through the Channel Tunnel, a project wholly-owned by strategy holding Getlink. The project is expected to be operational in mid-2022.
- Strategy holding Transurban reached an agreement to sell a 50% stake in its USA assets for A$2.8 billion to partners AustralianSuper (25%), Canada Pension Plan Investment Board (15%) and UniSuper (10%). The Transurban Chesapeake assets sold comprise of Transurban’s US roads currently in operation, projects in development and exclusive development rights to invest alongside Transurban in certain US states. The transaction helps to recycle capital for growth opportunities in Australia and North America, introduce aligned partners to share risk and reward and deconsolidate debt on their balance sheet.
- UK gas and electricity regulator, OFGEM, released its RIIO-2 Final Determination on the price control allowances for gas and electricity transmission the period 2021-26. The determination is particularly important for UK gas and electricity network operators SSE and strategy holding National Grid. OFGEM set the final allowed ROE at 4.02% for electricity transmission and 4.30% for the gas networks, which represent 32bps and 30bps improvements respectively from the draft determination. The capital allowance was also set roughly 20% higher than the draft determination, and additional funding has been made available for future green energy projects. The companies can either accept the final determination or appeal to the UK Competition and Markets Authority (CMA).
Stock research and investment process
Global concessions (toll roads and airports) have been hit hard in 2020 due to the COVID-19 pandemic, with lockdowns and mobility restrictions significantly reducing people’s ability and appetite to travel, for work or leisure, domestically and abroad. While this has been most stark for airports, toll road concessions have also been impacted. Restrictions and reduced mobility demand have been especially evident on toll roads that rely on commuter traffic, such as managed lanes. Managed lanes are typically built to relieve congestion on, and often run along the same travel corridor as, the alternative free roads. Traffic volumes on these assets took a big dive in March this year, as workers and businesses rapidly transitioned to Work From Home (WFH); parents home-schooled their children; and shopping, social, errand and airport activities were curtailed.
Whilst there has been some traffic recovery since then, a lack of improvement in COVID-19 case numbers and further virus outbreaks have continued to prolong restriction measures and depress traffic volumes. As a result, and amid growing concerns over the long-term structural impact of WFH on toll road patronage, share prices for toll road operators have experienced large falls this year (although some of this had recovered in early November on the back of positive news regarding a potential vaccine to immunize against COVID-19).
With increased uncertainty, there were opportunities to add stocks to our portfolio that looked oversold. In order to assess this, we studied the potential long-term impact of WFH and analysed the key drivers of long-term value in various toll roads – specifically looking at traffic volumes and tolls. We contemplated questions such as:
- How long will it take for traffic to return to pre-virus trend line (or to pre-virus levels in absolute terms)? Once traffic has recovered to pre-virus levels or trend line, then how will the long-term traffic growth trajectory be impacted by WFH?
- What trajectory would toll growth have taken had COVID-19 not happened, and what downward price pressure could we now see due to lower absolute traffic volumes or peak spreading, in the short-term? In the long-term?
We approached these questions from both a top-down perspective (coming up with estimates guided by projected population growth, wage growth, modal mix, and purpose of travel in these cities, and how these may evolve going forward) and a bottom-up perspective (light/heavy traffic mix on the specific roads, proportion exposed to WFH, traffic distribution throughout the day, and how this may change). We also started monitoring weekly traffic data updates released by companies, and tracked leading indicators of toll road demand such as congestion, travel speed, and mobility data published by the likes of TomTom, INRIX, Apple and Google to keep re-examining our views on what may happen over the medium and longer term. During the fourth quarter, we initiated a position in Spanish listed but global infrastructure company Ferrovial (FER), which was down around 20% since COVID struck.
FER owns stakes in the 407ETR tollroad in Toronto , US Managed Lanes (LBJ / NTE / NTE35W) in Dallas-Fort Worth, and London Heathrow Airport, amongst others. These assets are high quality, strategically significant, and operate under long-dated concessions (407ETR concession expires in 2098; US Managed Lanes expire in 2061; London Heathrow is a freehold asset). Currently >75% of the equity value is in the tollroad business which is poised for post-COVID-19 growth, followed by a much smaller exposure to airports (e.g. 25% stake in London’s Heathrow airport, amongst others). Both segments will be uplifted once the non-infrastructure Services business is divested, leaving only a residual equity exposure to FER’s in-house greenfield construction capability as a supporting element.
Unlike most other toll roads, the 407ETR and US Managed Lanes have flexible or dynamic pricing power. Their respective concession deeds require the company to increase tolls with increasing demand to ensure minimum service levels are maintained, giving it strong upside leverage to periods of high economic growth or inflation (but not necessarily a corresponding downside exposure to periods of economic contraction, e.g. average toll rates actually increased in the aftermath of GFC and COVID-19). FER’s free pricing provides a potential cyclical cushion if/when interest rates rise, given the positive combination of volume growth and pricing power is likely to overpower any negative impact from higher interest/discount rates.
As mentioned, traffic volumes have been impacted by government mandated lockdowns, mobility restrictions and Work From Home (WFH) policies instituted by businesses during the COVID-19 pandemic. The structural impact of WFH on short-term traffic is not yet clear, given mobility restrictions are still in place in many parts of the US and Canada. However, we think any impact should be mostly offset by some shift away from public transit to cars due to health concerns; compensatory changes to traffic behavior e.g. shorter but more frequent local trips, or more travel during non-peak periods (e.g. on the 407ETR / LBJ); and greater growth in heavy vehicle traffic due to increased e-commerce (e.g. on the NTE / NTE 35W). Longer term, general macro drivers (GDP, population, wage growth) and urban drivers (ongoing city sprawl, lack of road corridor capacity, lack of public transit alternatives) should mitigate any structural declines in long-term traffic growth.
In the short-term, it is not expected there will be material toll growth. FER has said it will offer temporary incentives on the 407ETR to encourage travel while volumes are depressed. For the US Managed Lanes, dynamic pricing automatically falls in proportion with reduced traffic. In the long-term, we remain optimistic that toll growth is likely to resume once traffic volumes normalize. The 407ETR only has ~15% more capacity left to reach ultimate configuration (with its central sections already at capacity pre-COVID-19) and the US managed lanes have limited scope for additions, so at final capacity, the freedom to set toll rates could become quite powerful. The US managed lanes are also still in ramp-up phase, so their true pricing power potential is not yet tested and known.
Issues in FER’s other non-infrastructure businesses (Construction, Services) existed pre-pandemic and were well-known, with Construction margins reaching rock-bottom levels and the Services business having to exit some onerous contracts. However, with orderbooks set to grow on the back of infrastructure stimulus packages, and work continuing to divest the Services business, some positive turnarounds could be on the horizon. FER also has positive optionality in terms of capex expansions and concession extensions and new tenders/projects (e.g. I-66 in Virginia, I-77 in North Carolina) where it can leverage its specialist, managed lanes construction and operational expertise/track record; continued asset sales (and buybacks); and continued benefit from refinancings of high-cost debt.
Putting all of the above together, we see material valuation upside in FER at the current share price. Furthermore, a sum-of-parts analysis implies an EBITDA multiple of ~25-30x for the 407ETR and low-30x for the US Managed Lanes, which are materially below the multiples of somewhat comparable recent toll road transactions of similar or shorter concession length, suggesting incremental upside value (e.g. in November 2020, an Abertis-led consortium paid 44x EBITDA for the Elizabeth River Crossings with concession expiry 2070; and in December 2020, Transurban divested 50% of its Chesapeake express lane assets with concession expiry 2087, at an implied valuation of 45x EBITDA).
Company engagement continued at pace over the quarter, with the GLI team holding dedicated ESG “deep dives” with a number of portfolio companies: Duke Energy, Entergy, Ameren, United Utilities, and Enbridge. MBA GLI’s approach to company engagement is bespoke, rather than pro forma, meaning we tailor our discussions to focus on the most material and meaningful ESG risks and opportunities specific to each company. Typically, our ESG meetings will include at least one member of senior management, in addition to company representatives from relevant specialist teams responsible for implementing the company’s ESG strategy. Having this cross section of attendance means we can ask questions related to high level strategy and positioning, such as oversight of climate change by the Board, alongside granular details on operationalisation, such as Standard Operating Procedures on emissions management.
We dedicate a sizeable amount of time in these meetings towards understanding how portfolio companies are managing climate risks through their governance structures, risk management programs, target setting, and strategy (the four pillars of the Taskforce on Climate-related Financial Disclosures (TCFDs)). Certain mechanisms can help strengthen a company’s climate risk oversight and help incentivise progress towards decarbonisation, for example: establishing a percentage of variable executive remuneration linked to emissions reduction targets and/or renewables uptake; and creating an enterprise-wide climate change policy with Board oversight.
Each of our meetings this quarter revealed considerable progress on climate risk management across portfolio companies – in and of itself a positive – but we also believe further work needs to be done. In preparing for these meetings, we are always seeking areas for improvement, and we treat these meetings as an opportunity to provide feedback to portfolio companies on areas that we believe will bring about the optimal business, stakeholder, and investor outcomes. An example of this is Duke Energy, who recently established a “net zero” carbon and methane emissions target. While this is positive, and we support their ambitions, we would also like to see them improve executive accountability to ensure successful execution against this commitment. Pleasingly, Duke agreed with our feedback, and is planning to introduce a key performance incentive (KPI) in 2021 to build upon its existing “renewables availability” metric. In relation to executive remuneration, Ameren has already implemented a 10% long-term incentive (LTI) tied to renewables uptake and storage, meanwhile Entergy, United Utilities, and Enbridge are all actively exploring options and asked us for guidance on best practice. In cases where a company is particularly exposed to the physical effects of climate change (for example, Entergy’s service territories along the Gulf Coast being more exposed to tropical storms and hurricanes, and United Utilities’ strategy to manage future water scarcity) we emphasised the need to undertake asset-specific and business continuity assessments of how more extreme weather events and changing weather patterns could affect their operations, along with detailed public disclosures to give investors decision-ready information.
Pleasingly, off the back of our engagement with ALLETE in Q2 2020, the company recently announced that it will report in line with the TCFDs and align its ESG reporting to the Sustainability Accounting Standards Board (SASB) in 2021 – these were specific areas for improvement that we had identified last quarter and flagged in our meeting with them. We believe this is a great outcome as it will not only strengthen their governance, risk management, strategy and target setting, but also improve transparency for investors while creating additional confidence in ALLETE as a company that is set to benefit from the tailwinds of decarbonisation. If you or your client would like to see our company engagement case studies or would like to discuss them in further detail, please let us know and we would be happy to assist.
Proxy voting activity
We engage the services of an independent Proxy Advisory to help inform, but not dictate, our decision making. Where we vote against a company resolution, we advise the company management prior to the AGM or EGM with our rationale for doing so. Over the quarter, we voted on all resolutions and did not abstain from any votes; 77% of votes were in favour and 23% were against. Where we voted against, our concerns mostly related to proposed remuneration amendments and cumulative voting measures.
As the world approaches a year since COVID-19 was first declared a global pandemic by the World Health Organization, the devastating economic impact continues to be felt in many countries despite the positive vaccine developments. While some economic indicators will quickly return to their ‘normal’ pre-pandemic levels once the virus is controlled, unemployment, however, will likely remain elevated for some time in many economies as aggregate demand catches up to aggregate supply. In particular, there is the risk that long-term unemployment – typically defined as a period of unemployment of 12 months or more – may be structurally higher and present a challenge to policymakers in their attempt to achieve higher inflation outcomes in the years to come.
Recent research by the Reserve Bank of Australia (RBA) using micro-level labour market data analysed the characteristics of long-term unemployment in Australia. The research points to a well-known causal relationship whereby the longer a person remains unemployed, the more difficult it tends to be for them to find a job. In fact, long-term unemployed persons were found to be more than twice as likely to leave the labour market as they are to find employment. The authors claim that this is primarily because those who become long-term unemployed may start to lose skills and networks over time, they may become stigmatised by potential employers, or they may eventually become discouraged and leave the labour force. The conclusions of the paper are largely consistent with similar research in other developed markets.
This has important potential implications for many economies as inflation and unemployment rates are inversely related – that is, periods of low unemployment tend to correspond with higher inflation, and vice versa. This relationship is commonly known as the Phillips curve. As a result, structurally higher levels of long-term unemployment imply a lower level of inflation than would otherwise be the case.
Unfortunately, the nature of the global COVID-19 pandemic restrictions has meant that some unemployed persons have remained without employment for long periods. Some of the worst affected industries from the pandemic, such as the tourism industry, are likely to have laid off staff during the pandemic and employment in these industries are unlikely to return to pre-pandemic levels until well into the economic recovery, if ever. Additionally, unemployed individuals in these industries may also find it more difficult to transition into other less affected industries because they may lack the necessary skills and experience for these roles. In the US, after an initial surge in newly unemployed persons at the onset of the pandemic, the share of long-term unemployed (defined as 27 weeks and over) has since risen sharply to now represent around 37% of total unemployed, from around 20% pre-pandemic (Figure 1).
Figure 1: Percent of US unemployed persons, unemployed duration of 27 weeks and over
At this stage, it is still not clear what lasting impact the pandemic will have on the number of long-term unemployed going forward. If sustained for some time, it could lead to adverse impact on economies through higher unemployment rates and the potentially deflationary pressure on prices. Unfortunately, monetary policy is somewhat limited in its ability to reduce the level of long-term unemployment, which places greater importance on fiscal policy measures to drive the post-pandemic economic recovery.
The MSCI AC World Index rallied by 14.7% in USD terms during the quarter as positive news of vaccine developments gave hope to a turn in the tide against the pandemic and mitigation of economic downside risks. Major equity markets finished the year in positive territory with the US, Japan and China gaining 20.7%, 8.8% and 28.1% respectively in local currency terms during the calendar year. Remarkably the US S&P500 index finished the year at all-time highs while European markets were mixed as another wave of infections and lockdowns impacted sentiment.
The last twelve months have been a tumultuous time for both humanity and global economic conditions. The International Monetary Fund’s (IMF) world output projections for calendar year 2020 fell from a growth forecast of +3.4% at this time last year to a contraction of -4.9% by the middle of the year. At the peak of social distancing and lockdowns, manufacturing fell by almost 20% and the equivalent of around 400 million full-time jobs were lost. Since then sentiment has improved as economies re-opened and governments enacted unprecedented levels of monetary and fiscal stimulus, leading the IMF to revise growth to -4.4% in October. Fiscal support measures announced by governments in advanced economies add up to more than 9% of GDP with another 11% in the form of various liquidity support measures. Overall the IMF is expecting a fairly rapid recovery with global GDP in 2021 expected to be 0.6% above 2019 levels. However, this is largely driven by the stronger than expected recovery by China (the only country expected to grow in both 2020 and 2021), with most other countries still expected to be below 2019 levels.
While activity is recovering, most countries are still around 4% below pre-pandemic levels, China being the exception
US GDP rebounded by 33.4% as consumption and exports helped to stage a partial recovery from the halt in economic activity during the prior quarter. The unemployment rate continued to improve to 6.7%, which is 8% lower than the peak in April, but still 3.2% higher than pre-pandemic levels in February. The outlook for the new year looks encouraging following the passing of a $900 bn fiscal package in late December which included stimulus payments of up to $600 per person and an extension of unemployment benefits. The USD continued to depreciate against other currencies unwinding earlier pandemic gains (driven by its status as a safe-haven currency) and coming under pressure from the Federal Reserve’s sizeable asset purchasing program. As expected, the Fed kept policy rates unchanged at 0-0.25% during the quarter.
Economic activity across Europe also improved with GDP increasing by 8.5% in Germany, 16% in the UK and 18.7% in France as household consumption and exports recovered from depressed levels. UK’s Brexit deal was finalised at the end of the quarter with no increase in tariffs or quotas for the time being, avoiding a potentially negative outcome for the UK. With newfound independence from the EU, the UK signed a new trade deal with Japan and is in discussions with the US, Australia and NZ for new trade terms. Following a resurgence of infection rates, the European Central Bank extended its asset purchasing program and increased the size of its ‘pandemic emergency purchase program’ by €500 bn. The Bank of England also expanded its asset purchase program in November, though kept monetary policy unchanged holding the current bank rate at just 0.1%.
China continued to generate strong GDP growth of 2.7% assisted by fiscal and monetary stimulus and buoyant exports of medical and IT equipment. Household consumption improved as the government sought to improve domestic demand as part of its ‘dual circulation’ strategy. Growth in Japan rebounded by 5.3% with rising consumption and exports helping the country out of recession. Household spending received a boost from nationwide cash handouts. Japanese exports to China were boosted by stockpiling of semiconductors and related machinery by China. The Indian economy also enjoyed a recovery with GDP growing by 21.9%, helped by stronger agriculture, construction and manufacturing sectors while the services sector still languished.
Similar to most other regions, economic activity in Australia improved with GDP growth of 3.3% boosted by an improvement in household consumption. Net exports were weaker with the outlook remaining mixed as geopolitical tensions and import restrictions impact exports of agricultural products and coal to China, though iron ore demand remains strong. Unemployment was lower although hours worked remain 4% below pre-pandemic levels. Total state and federal government fiscal deficits are expected to be around 15% of GDP in the 2020/21 period. Overall, the base case from the Reserve Bank of Australia is for GDP to recover to pre-pandemic levels by the end of 2021. Due to the significant amount of spare labour capacity the Reserve Bank of Australia noted fiscal and monetary policy support would be required for a considerable period and signalled for the cash rate to remain at current low levels of 0.1% for at least 3 years.
 Maple-Brown Abbott representative account.
 Cassidy N, I Chan, A Gao, G Penrose (2020), ‘Long-term Unemployment in Australia’, RBA Bulletin, December.
 Abraham K, J Haltiwanger, K Sandusky and J Spletzer (2016), ‘The Consequences of Long-Term Unemployment: Evidence from Linked Survey and Administrative Data’, ILR Review, Cornell University, 72(2), pp 266–299.
 GDP data is based on September quarter-on-quarter growth rates.
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The Global Listed Infrastructure Composite includes accounts that invest in global listed infrastructure securities with a focus on regulated, contracted and concession assets or networks that provide essential services. The objective is to outperform the index over rolling five year periods. Portfolios are concentrated and typically hold between 25-35 stocks. Composite returns are presented gross of management fees, custodial fees, and withholding taxes but net of all trading expenses. Past performance is not a reliable indicator of future performance. Investments are subject to investment risk including possible delays in repayment and loss of income and principal invested. Neither Maple-Brown Abbott nor any of their related parties, directors or employees, make any representation or give any guarantee as to the return of capital, performance, any specific rate of return, or the income tax or other taxation consequences of, any investment. Any comments about individual stocks or other investments are not a recommendation to buy, sell or hold. Any views expressed on individual stocks or other investments are point in time views and may be based on certain assumptions and qualifications not set out in part or in full in this information. Information derived from sources is believed to be accurate, however such information has not been independently verified and may be subject to assumptions and qualifications compiled by the relevant source and this paper does not purport to provide a complete description of all or any such assumptions and qualifications. The standard management fee in USD for Global Listed Infrastructure accounts is 0.75% for first the $50 Million, 0.65% on the next $150 Million and 0.55% of the balance. The minimum portfolio size for inclusion in the composite is AUD 5 million. A list of all composite descriptions is available upon request.
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