First State Global Listed Infrastructure Fund
Market review
-Global Listed Infrastructure declined in August as rising long bond yields and geopolitical concerns weighed on financial markets. The UBS Global Infrastructure & Utilities 50-50 Index fell 4.9% in sterling terms, underperforming the MSCI World Index which declined by 4.1%.
-The best performing infrastructure sectors were Satellites, Toll Roads and Ports. Satellites outperformed as cash flow visibility, attractive valuations and sustainable dividend yields drew investor interest. Toll roads held up well as increased levels of economic activity supported the earnings of these volume-sensitive infrastructure assets. Ports performed well as Chinese ports reported strong earnings growth and data from China bucked recent trends, pointing towards better economic conditions.
-The worst performing sector was Regulated Utilities as defensive, long-duration assets struggled in an environment of rising bond yields. Selected investment opportunities remain in stocks with potential for corporate restructuring. Passenger Rail was another poorly performing sector as Japanese shinkansen operators fell after recent gains.
-Australia and New Zealand was the best performing region in August. Oversold stocks such as Asciano reported better-than-expected results. Asian infrastructure also held up well largely driven by Chinese stocks for reasons outlined above. Infrastructure in Japan lagged as the economy was weaker than market expectations.
Fund review
-The fund fell by 4.1% over the month, 81 basis points ahead of the benchmark.
-Companies with exposure to Chinese economic activity rallied during the month. Asciano reported 13% earnings growth driven by its take-or-pay export coal contracts in a subdued economic environment. Management also increased the dividend and flagged positive free cash flow generation as it nears the end of its recent investment cycle. Chinese port operator China Merchants Holdings rallied after reporting 10% earnings growth in the first half driven by a 12% increase in container throughput.
-UK-listed private airport operator BBA Aviation performed well as it demonstrated its ability to generate cash flow and consolidate its industry through value-accretive acquisitions. Towards the end of the month reports emerged that it was considering a merger with a key competitor.
-Satellite operator Eutelsat bounced back in August after the market digested its new earnings guidance and addition to its satellite fleet. Global mobile satellite services operator Inmarsat reported solid mid-single digit growth and noted they would meet the higher end of their guidance.
-GDF Suez reported better-than-expected results and offered a less pessimistic outlook for the future. This France-listed global integrated utility offers deep value and a high dividend yield.
-Leading the declines were Regulated utilities National Grid, PPL Corp and Atmos Energy which fell with UK and US bonds. US listed PG&E Corp negatively contributed to fund performance as the market once again grew concerned over the outcome of the San Bruno case.
-French stocks Eurotunnel and Vinci declined as soft economic data weighed on these volume-sensitive infrastructure stocks. Long-term valuations remain supportive.
-Zurich’s airport operator Flughafen Zuerich fell as it failed to reach an agreement with airlines over a new tariff structure.
Transaction activity
-Over the month we built a position in Italian gas transmission & distribution utility Snam SpA. This is a high quality regulated utility that trades at a discount to its regulated asset base. As the stock progresses through its regulatory cycle we expect the market to recognise its structural growth options.
Infrastructure award of the month –Rupert Pearce
-This month’s award goes to Rupert Pearce, CEO of the world’s dominant mobile satellite services operator Inmarsat. The company’s core business sells satellite capacity to maritime users who need to communicate from the world’s oceans (examples include cargo and cruise ships). Since taking over as CEO, Mr Pearce has effectively reorganised the business and re-priced its offerings to maximise value from Inmarsat’s unique satellite fleet. The company has returned to growth and is well placed to capture new opportunities once its next generation fleet launches.
Outlook
-The Fund invests in a wide range of global listed infrastructure assets including toll roads, airports, ports, railroads, utilities, pipelines, energy storage, mobile towers and satellites. These sectors share common characteristics, like barriers to entry and pricing power, which can provide investors with inflation-protected income and strong capital growth over the medium-term.
-We have been cautious on ‘income’ sectors such as regulated utilities and energy pipelines that are most affected by rising bond yields. This theme has started to play out in recent months although we continue to believe the best risk-reward is in ‘growth’ orientated sectors such as airports, toll roads, ports and railroads. These sectors benefit from increasing volumes and positive operating leverage in an improving economic environment.
