Interactive Investor

Fund Spotlight: a defensive and diversifying option for income seekers

The ii Research Team offers an update and view on an income fund that benefits from inflation-linked earnings.

6th March 2024 09:46

ii Research Team from interactive investor

Listed infrastructure refers to publicly traded companies that own and operate infrastructure assets, such as airports, energy and water utilities, or railways.

The asset class has historically been defined by consistent, inflation-linked earnings growth through economic cycles with lower volatility versus broader equities.

The sector has diversifying qualities that are attractive in today’s economic environment. For example, utilities especially are defensive in nature as pricing mechanisms are often protected by regulatory contracts, meaning price increases can be passed on to users. This protects companies’ top lines from inflationary forces and means earnings grow slowly but steadily compared with more cyclical sectors.

While infrastructure may well lag in a momentum-driven market, it can provide a buffer when wider equity markets fall, as was the case in the first half of 2022.

Infrastructure investors look set to benefit from a long, expensive green transition, which requires a lot of investment, with governments stepping in with enormous subsidies. Another tailwind is the dislocation in valuations of listed and unlisted infrastructure that has led to frequent bidding for quoted companies, often at attractive premiums, by cash-rich private equity investors.

FTF ClearBridge Global Infrastructure Income invests in listed-infrastructure equities and looks to provide a return above the level of G7 countries’ inflation, plus an annualised 5.5% over a market cycle, as well as provide an attractive income.

The process starts with defining a proprietary universe of around 170 infrastructure-related securities, which is further narrowed to construct a portfolio of 30-60 companies (currently 39) displaying attractive quality and yield attributes. The approach leverages a large team of analysts across the company’s research platform to assess the fundamentals of each business, while also considering the top-down, macroeconomic picture. The resultant portfolio pays little mind to any benchmark and has a notable bias towards regulated utilities above the wider infrastructure sector.

The fund began life under the predecessor firm, RARE Infrastructure, which was co-founded by Nick Langley in 2006, before joining Franklin Templeton and rebranding as part of ClearBridge Investments in 2020. The current management team is comprised of Nick Langley, Shane Hurst, Charles Hamieh and Daniel Chu, who boast considerable experience across both listed and unlisted infrastructure strategies.

What does the fund invest in?

The portfolio focusses on regulated and contracted utilities companies, such as water, electricity and renewables providers as well as user-paying assets, such as operators of airports and toll roads. Among these companies, the team looks for businesses with predictable cash flows, healthy yields and quality asset bases. There’s a good spread of holdings from extremely large companies down to businesses with under £10 billion in market caps.

While there is substantial geographic diversification, there is a preference for northern Europe, with the UK and Spain making up around 10% and 9% of the portfolio respectively. The allocation to the US of just 38% is small when compared to global infrastructure indices. The country allocation is flexible and, while predominantly invested in developed markets, delves into emerging markets via a 5% allocation to Brazil and just under 2% in China.

Exposure to the electricity sector (43%) is the most substantial allocation currently, with gas (10%) and toll roads (9%) the next largest sectors. While the portfolio is not thematic in nature, there are exciting themes represented, such as renewables (8%), that may pique investors’ interest, though this is an area of the portfolio that has struggled over the past two years.

How has the fund performed?

Over the past five years, while the fund marginally lags its tough G7 CPI + 5.5% index, it has comfortably outperformed peers by more than three percentage points per year with an annualised return of 7%. What is more, the fund boasts one of the strongest yields within its sector at 5%, versus an average of nearer 3%. This yield has been paid consistently and seldom falls below its target 5%.

Investment01/02/2023 - 31/01/202401/02/2022 - 31/01/202301/02/2021 - 31/01/202201/02/2020 - 31/01/202101/02/2019 - 31/01/2020
FTF ClearBridge Global Infras Inc WAcc-6.28.412.73.022.1
G7 Inflation + 5.5%8.813.710.66.26.9
Morningstar Sector Equity Infrastructure-6.46.110.5-2.714.1

Source: Morningstar Total Return in sterling to 31 January 2024. G7 Inflation sourced from FTF Clearbridge. End of January the most recent data point for G7 inflation. 

There’s a consensus among the managers that the derating of utilities companies over the past year actually offers opportunity for investors. A macroeconomic slowdown that puts downward pressure on the earnings of companies across other equity sectors could make the predictable and steady earnings of utilities companies look more appealing. Further, when interest rates eventually fall, as they are forecast to do this year, this ought to favour this defensive and rate-sensitive sector.

Why do we recommend this fund?

FTF ClearBridge Global Infrastructure Income is a compelling option for investors seeking a defensive fund with a strong and consistent yield. Given the fund’s low correlation with global equities, it may serve as a diversifying force in an investor’s portfolio to be held for five years or more. The fund is likely to lag in a fast-rising equity market, but the stability and quality of the portfolio has provided investors consistent long-term returns and reliable income distributions. he yield of near 5% is one of the best in its peer group.

While income stability is a key focus for the managers, the fund is also well positioned to benefit from the structural tailwinds behind the utilities and wider infrastructure sectors. The fund has proven it can deliver capital appreciation alongside a steady dividend distribution, which has made it one of the best performing funds in its sector over the long term.

The fund is sizable at £1.2 billion in assets. The yearly ongoing charge (OCF) of 0.82% is compelling given the vast resource and experience behind the strategy. As such, the fund is included in ii’s Super 60 as a core offering.

The latest factsheet can be found here.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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