EBR - ClearBridge Global Infrastructure Value Strategy Q1 2023 Portfolio Manager Commentary
2023-04-22 21:45:00 ET
Summary
- ClearBridge is a leading global asset manager committed to active management. Research-based stock selection guides our investment approach, with our strategies reflecting the highest-conviction ideas of our portfolio managers.
- Infrastructure trends that closed out 2022 continued in the first quarter of 2023, with energy prices stabilizing amid a warmer than expected winter.
- A continuing re-emergence of mobility and travel lifted the airports and toll roads sectors, particularly in Western Europe, the strongest contributing region in the first quarter.
- Bank collapses will be important as lending standards tighten, choking off some credit for large corporates, though infrastructure companies, we think, will continue to have access to credit to continue to maintain investment in their underlying asset bases.
By Charles Hamieh, Shane Hurst, Nick Langley, & Simon Ong
Greater Mobility Lifts Airports, Drives Toll Roads
Market Overview
Amid a growth push in the first quarter, infrastructure made solid gains but trailed global equities. Infrastructure trends that closed out 2022 continued in the first quarter of 2023, with energy prices stabilizing and even declining across Europe and the rest of the globe amid a warmer than expected winter. This kept pressure off European utilities especially, as well as households. A continuing re-emergence of mobility and travel lifted the airports and toll roads sectors; these user-pays infrastructure sectors were among the top contributors for the quarter, particularly in Europe, where Aena ( ANNSF ), Ferrovial ( FRRVF ) and Vinci ( VCISF ) performed well.
Aena is the monopoly owner of the Spanish airport system, operating 46 airports under a dual-till regulatory regime. It also manages London Luton Airport, controlling a 51% stake. Shares increased over the quarter as Aena continued to recover from an oversold position in October 2022 as concerns over a deep European recession subsided, particularly as energy costs fell and forward-looking passenger data remained resilient.
Ferrovial operates toll road concessions and airports globally, with its largest assets being the toll road operator 407 ETR (Express Toll Route) in Ontario, Canada, and its stake in London’s Heathrow Airport. Ferrovial’s share price rallied as the market began to anticipate a soft landing. The stock was further supported by reduced bond rates, particularly in North America, where Ferrovial’s key assets are located. Additionally, general traffic data remained resilient and a number of brokers upgraded recommendations as they updated their valuations for toll road I-66 in Northern Virginia, which opened in late 2022.
Vinci operates half of France’s toll road network under long-term concession agreements, a growing portfolio of airport concessions and a global contracting business. The company reported strong earnings results and free cash flow generation for FY22, and continues to see positive momentum across its French toll roads network, its airports portfolio and its construction business into FY23.
Bond yields came off recent highs, supporting longer-duration assets such as renewables, which performed well. Lower yields are also positive for communication towers, for example Cellnex ( CLNXF ), Europe’s leading independent infrastructure owner and operator for wireless telecommunication. Cellnex’s share price increased as the market continued to appreciate the company’s strategic pivot underpinned by the resignation of the CEO, and was further supported by moderation in bond rates and inflation expectations. Yields remain elevated, however, and some broad market pressure on real estate — tower companies are generally structured as REITs — is still being felt.
On a sector basis, rail and energy infrastructure were the main laggards. A weak outlook for the rail industry amid growing recession expectations, continued service challenges and fuel and labor costs increases are headwinds for the sector, although we have slightly increased our exposure to North American rail to diversify cyclicality in the portfolio and capture some relative value. Energy infrastructure trailed as last year’s tight price environment has loosened somewhat with abnormally warm weather; we have reduced our exposure through trims across our energy infrastructure holdings.
In terms of individual holdings, Brazilian electric utility Centrais Elétricas Brasileiras ( EBR , Eletrobras ) was the largest detractor from quarterly performance. Eletrobras is one of Brazil’s largest integrated utilities, operating in the generation and transmission segments. A combination of weak spot power prices in Brazil and negative commentary from President Lula caused weakness in Eletrobras during the first quarter of 2023.
Outlook
Despite recent volatility, we are maintaining our defensive positioning as tightened financial conditions will eventually impact the economy and ultimately corporate earnings; we are starting to see some weakness in earnings from higher interest costs. The Fed and many other central banks around the world have to maintain their hawkish positions, and have started to accept recessionary risks as increasingly necessary to combat the stubbornly high levels of inflation. Given that we have reduced our GDP sensitivity over the last 12 months, we should expect this defensive rotation to be more moderate than in 2022.
There is a large debate whether there will be a soft landing or no recession versus a deeper recession. Monitoring the economic data will be key here, and portfolio positioning will be somewhat dependent on this. The banking collapses from Silicon Valley Bank and Credit Suisse ( CS ) add a very credible data point toward a recessionary environment when paired with the Fed’s need to continue its monetary tightening policy direction.
Bank collapses in the U.S. and Europe will be important later in the year, as bank lending standards will tighten, choking off some credit for large corporates in particular. However, infrastructure companies raising debt in March priced deals at lower rates than expected, though slightly higher than similar deals earlier in the year. Infrastructure companies, we think, will continue to have access to credit to maintain investment in their underlying asset bases.
Portfolio Highlights
We believe an absolute return, inflation-linked benchmark is the most appropriate primary measure against which to evaluate the long-term performance of our infrastructure strategies. The approach ensures the focus of portfolio construction remains on delivering consistent absolute real returns over the long term.
On an absolute basis, the Strategy saw positive contributions from seven of nine sectors in which it was invested (out of 11 total) in the first quarter, with the toll roads, water, airports and renewables sectors leading and the rail and energy infrastructure sectors detracting.
On a relative basis, measured against the S&P Global Infrastructure Index, the ClearBridge Global Infrastructure Value Strategy underperformed during the first quarter.
Overall sector allocation detracted from relative results while stock selection contributed positively. An underweight to the airports sector and an overweight to the water sector along with stock selection in the rail sector detracted the most. Conversely, stock selection in the water, toll roads, renewables and electric sectors and an underweight to the gas sector proved beneficial.
On an individual stock basis, the largest contributors to absolute returns in the quarter were Aena, Cellnex, Severn Trent ( SVTRF ), SSE and Terna ( TERRF ). The largest detractors were Eletrobras, Constellation Energy ( CEG ), NextEra Energy ( NEE NEE ), Gibson Energy ( GBNXF ) and American Tower ( AMT ).
During the quarter we initiated positions in U.S. electric utility CenterPoint Energy ( CNP ), German airport operator Fraport ( FPRUF ) and French airport operator Aeroports de Paris ( AEOXF ). Meanwhile, we exited Canadian energy infrastructure company Enbridge ( ENB ) and Canadian electric utility Hydro One ( HRNNF ).
Charles Hamieh, Managing Director, Portfolio Manager
Shane Hurst, Managing Director, Portfolio Manager
Nick Langley, Managing Director, Portfolio Manager
| Past performance is no guarantee of future results. Copyright © 2023 ClearBridge Investments. All opinions and data included in this commentary are as of the publication date and are subject to change. The opinions and views expressed herein are of the author and may differ from other portfolio managers or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information. Performance source: Internal. Benchmark source: Standard & Poor's. Copyright © 2023 ClearBridge Investments, LLC |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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ClearBridge Global Infrastructure Value Strategy Q1 2023 Portfolio Manager Commentary