‘On-the-ground’ research delivers competitive advantage in listed infrastructure

Now in its 20^th year of managing global listed infrastructure portfolios, Macquarie Asset Management (Macquarie AM) has joined the ranks as the second fund manager to earn back-to-back wins at the Financial Newswire/SQM Research Fund Manager of the Year Awards 2024.

Macquarie AM’s International Infrastructure Securities Fund – Unhedged emerged victorious in the Listed Infrastructure category, reflecting what Portfolio Manager, Anthony Felton, said was a “highly competitive” sector that has a “strong representation from Australian managers”.

The award win is the culmination of a celebratory time for Macquarie AM, with the business reaching its 20-year milestone and the fund itself spending more than half of that time in market. Felton told Financial Newswire that it’s the ultimate reward not just for the investment team in their successful outcome delivery for clients, but also for the business as a pioneer in the sector.

“There are a few factors to credit for the substantial growth of the business in the last 20 years. One: unwavering focus on the investment process that delivers meaningful insights through research and a well-resourced team supported by an institutional equities platform, allowing us to focus on delivering better outcomes,” he said.

“Two: sticking to our process through market volatility. We seek to identify mispriced stocks through a proprietary valuation process, focusing on long-term cash flows. Stock price volatility provides opportunities to invest at discounted valuations.

“And three: a flat team structure. We’re an investment team comprising portfolio managers and investment analysts. All team members have input into investment decisions to deliver alpha.”

A unique market environment has seen listed infrastructure assets flourish, cementing their position in investors’ portfolios due to their ability to “lower portfolio volatility, provide downside protection and generate an attractive yield”, according to Felton.

But where Macquarie AM go over and above is in their “deep fundamental research”, a core component of the fund’s “competitive advantage” and allowing it to deliver positive returns of plus 11 per cent in 2022, at a time where global equity saw negative 13 per cent.

“The fund offers investor exposure to pure infrastructure assets. The objective is to deliver alpha for our clients and to exceed their expectations for an investment in the asset class. It’s about total return and consistency of alpha generation, low volatility and downside protection,” Felton said.

“The fund and its underlying strategy have delivered strong performance during a period of significant macroeconomic and geopolitical volatility.

“We have an investment team that’s located on the ground in Australia, the United States and Europe. We take a strict approach to defining our investable universe. Over 80% of enterprise value must be derived from infrastructure activities, defined as assets that are essential for our daily lives or for the growth of the economy.

“These assets feature high barriers to entry; they have stable cash flows, regulation or contracts, and, in many instances, direct inflation linkages.

“We seek to generate alpha from multiple sources within the experienced team with a bottom-up approach to research and a wide geographic footprint, enabling our investment team to identify mispriced assets.”

Macquarie AM’s proprietary process has undeniably withstood the tests of time, and it’s already showing signs of adapting alongside the next mega-force driving the future of investment: net zero.

“Transition to net zero is a significant tailwind for infrastructure assets,” Felton said.

“It’s a process that will occur and support the asset class for a long period of time. Our analysis of carbon emissions for global equities shows that the shift towards lesser emissions has been entirely attributable to companies operating in the infrastructure sector, primarily utilities.

“Over the 20 years we’ve been managing portfolios, we’ve seen a significant shift in the generation mix for companies we cover. For example, Scotland-based electric utility, SSE UK, is one of the first stocks that we covered 20 years ago, when it produced over 80% of electricity from fossil fuels which included coal, gas and oil.

“Today, it has a generation mix which is focused on renewables and gas; it has exited coal. That shift has come from increased investments in regulated and contracted assets, such as increased renewables and network investments.

“This thematic is a tailwind for the sector because it’s driving a lot of capital investment. There’s a direct linkage between capital investment in infrastructure and increased revenues.

“We’ve seen a shift over the last 20 years from investments in net zero assets having to be subsidised, through to technology such as wind and solar being cost-competitive without subsidies.

“Investments in renewables and their associated networks now make sense from cost and carbon-reduction perspectives and are being increasingly supported.”