MEGI - MEGI: Recession Resistant High Yield Income From This Infrastructure Megatrends CEF

2023-04-18 10:39:52 ET

Summary

• Utilities and infrastructure assets offer consistent and growing cash flows over time due to reinvestment, even during times of recession.
• The MEGI fund from New York Life Investments/CBRE currently trades at its widest discount in the past year and pays a steady 8.8% yield.
• Over the past 6 months, MEGI has far outperformed other similar funds on a total return basis.

While many pundits and financial experts still expect or forecast a recession to hit sometime in 2023, some are even predicting an imminent recession , and it is best to prepare for that eventuality. There are some investments that hold up better than others do when a recession occurs, so one way to prepare for that forecasted event is by increasing your income holdings with defensive picks. During recessions some of the industries that tend to be defensive in recessionary environments include healthcare, utilities/infrastructure, and consumer staples. People need medical treatment, need their gas, electricity, water/sewer, and other basic needs met, and they need to eat regardless of what else is going on in the world.

Listed infrastructure is a resilient and attractive asset class in the current macroeconomic environment and should also withstand the impacts of a recession should one occur. In fact, according to this document from New York Life Investments, listed infrastructure as an investment class offers an advantage to investors for realizing attractive returns even during recessions for several reasons:

Listed Infrastructure comprises essential assets-utilities, communications, transport and energy-which have contracted and regulated returns. These contracted and regulated cash flows, enabled by secular demand forces, have enabled earnings and dividend growth over the course of economic cycles. As a result, we see infrastructure as a strategic allocation for investors.

Stable and resilient cash flows from listed infrastructure are uncorrelated to broader economic conditions and continue to rise above inflation with reinvestment contributing to cash flow growth over time as illustrated in this chart from the document.

My recommendation for a total return investor who is interested in current high yield income even during a recessionary period is the Mainstay CBRE Global Infrastructure Megatrends Fund ( MEGI ) from New York Life Investments. In case you have not heard of them, you may be familiar with the parent company, New York Life Insurance Company. They are a global diversified asset management firm with over $600B in AUM. The Mainstay funds are one segment of their product offerings which also include mutual funds, ETFs, CEFs, and other alternative investment products.

MEGI is a relatively new CEF, with an inception date of 10/27/21, that invests in utilities, infrastructure, and related assets based on a global megatrend theme. Those global megatrends include Decarbonization, Asset Modernization, and Digital Transformation. The breakdown of portfolio holdings by megatrend is illustrated in this caption from the fund fact sheet .

New York Life Investments engages the services of CBRE Investment Management as fund sub-advisor. From the April press release declaring the fund's April distribution, this paragraph describes CBREIM in more detail:

CBRE Investment Management Listed Real Assets LLC is the listed real assets arm of CBRE Investment Management, a leading global real assets investment management firm, with $149.3 billion in assets under management* as of December 31, 2022, operating in more than 30 offices and 20 countries around the world. Through its investor-operator culture, the firm seeks to deliver sustainable investment solutions across real assets categories, geographies, risk profiles and execution formats so that its clients, people and communities thrive. CBRE Investment Management is an independently operated affiliate of CBRE Group, Inc. (CBRE), the world's largest commercial real estate services and investment firm (based on 2022 revenue).

One of the fund's portfolio managers, Hinds Howard, was featured in an interview with CEFA Insights published on Seeking Alpha in January 2023 describing the fund and how it is designed to take advantage of the megatrends that are impacting global infrastructure investment. This is what he had to say about MEGI:

MEGI was launched in October 2021. It was designed to be an actively managed portfolio, built around three enduring secular themes impacting global infrastructure investment, and we call those investment themes mega trends. Owners of infrastructure assets grow by investing capital with defined returns, so by aligning the portfolio with these mega trends, we can deliver an attractive total return with an emphasis on current income.

I first learned about MEGI from fellow SA analyst, Nick Ackerman, who has written about the fund several times, most recently in November 2022, where he discussed the deeply discounted yield which was closer to 9.5% at the time.

MEGI Facts and Top Holdings

MEGI currently yields about 8.8% based on a dividend of $.1083 that is paid monthly and is trading at a discount to NAV of roughly -15.5%. The fund is global with about 50% of fund holdings based in North America, 32% Europe, and 18% Asia-Pacific. The fund has total managed assets of approximately $1.2B with 28% leverage (as of 12/31/22). The holdings consist of 85% common stock, 14.5% Preferred and Other, and a small cash position. The expense ratio is a bit on the high side at 1.92% according to CEFconnect.

The Top 5 holdings as of 12/31/22 are shown in the fact sheet.

However, as of the time of writing on 4/17/23 the top holdings shown on SA (which are as of 2/28/23) are a bit different with Enbridge (ENB) replacing ONEOK (OKE), Williams Companies (WMB) dropped off the top 10, and Atlantica Sustainable Infrastructure ( AY ) moving into the #5 slot.

The fund's past performance has not been great with the launching of the fund occurring at probably the worst possible time just before the market peaked in late 2021 and has been on a bear market decline ever since. If you were to judge this fund's performance based on what has occurred since inception without considering what has happened in the broader markets during that time, you would probably just decide to avoid it altogether. That is, up until Q4 of 2022 when things started to turn around.

The fund performance as of 12/31/22 is shown on the fact sheet with a -22.5% total return since inception at market price. However, beginning with Q4 2022 that performance has turned around and the fund's total return is now up over 28% in the past 6 months. That 6-month total return far exceeds that of the S&P 500 over that time frame and provided more than double the return of the Utilities Select Sector SPDR fund (XLU).

I believe that part of the reason for that strong 6-month return is due to the relative outperformance of many of the current top holdings during that time. To briefly review a few of them, I will include screenshots of the Summary page for each of the top 5 and highlight the distribution yield for each.

Enel SpA

National Grid Plc

Enbridge

Atlas Arteria (from Yahoo Finance)

Atlantica Sustainable Yield

As you can see the top holdings have all had strong positive returns over the past 6 months and all yield a forward distribution of more than 6%. For this reason, the NAV of the fund has begun to improve, and the fund's distribution is well covered. However, the market price has not fully recovered and still trades at an even wider discount now than the average 1-year discount as shown in this chart from CEFconnect.

As Portfolio Manager, Hinds Howard stated in the CEFA interview from January, the fund is well positioned to take advantage of a long-term trend that is likely to impact infrastructure investments globally over the next 20 years:

By 2040, we estimate over $100 trillion of investment will be required to repair, modernize, and build new infrastructure assets critical to societies around the globe. The landmark Inflation Reduction Act passed earlier this year that had a direct and indirect support for renewable energy assets is just a small part of the global super cycle of infrastructure investment spending, which is likely to occur over the next 20 years.

Fund Distributions

As mentioned at the beginning of this article, the fund's objective is to offer investors a high level of total return with an emphasis on current income. The total return is still constrained by the fund's price performance over the past 18 months; however, the fund's distributions have remained consistent at $.1083 since January 2022 when it paid the first monthly dividend. The SA dividend history page illustrates the steady dividend payout since inception.

And while the fund uses leverage to help cover the additional income required to bring the distribution up to nearly 9% at the current market price, the distribution appears to be well covered with no ROC in any of the recent distributions. The latest press release disclosing availability of the April 19a notice includes a table that shows the makeup of the latest monthly distribution along with the YTD numbers.

While NII covered less than 70% of the April distribution, long-term capital gains made up most of the remainder. But YTD the NII coverage is still above 80%. Based on the recent returns of some of the top holdings, I would expect that future distributions will also be well covered even if we do experience a recession in the next several months with the steady cash flows being paid by the underlying holdings.

The fund does offer a DRIP program for investors who wish to reinvest the monthly dividends. That plan is outlined in detail starting on page 25 in the 2022 Annual Report.

Other Investments in Infrastructure Assets for Income

While MEGI is certainly not the only fund that specializes in infrastructure and other "essential assets", it has performed better over the past 6 months than other funds with similar holdings. One fund that I recently covered is Brookfield Real Assets Income Fund (RA). RA offers investors a current yield of 14% but trades at a premium of about 11% to NAV. Another one to consider is Virtus Total Return Fund (ZTR). ZTR trades at a discount of -10.5% and offers a current yield of 15%. I hold all 3 funds in my No Guts No Glory Income Compounder portfolio . Another fund that I have previously held but do not currently is the Cohen&Steers Infrastructure Fund (UTF). UTF trades near par at a slight discount of -1.8% and yields just under 8% currently. I compared the 6-month total return of all four funds over the past 6 months and MEGI came out way ahead of the other 3.

This confirms my belief that MEGI has turned things around recently and is likely to continue to outperform going forward.

Outlook for 2023 and Beyond

Again, quoting Hinds Howard, MEGI Portfolio Manager, from the CEFA interview published in January, he had this to say about the fund's positioning heading into 2023:

Infrastructure fundamentals are accelerating into 2023. We anticipate company earnings growth of around 8.5% in 2023, up from 6% last year, even with higher interest rates and weaker economic conditions. … We believe we're in the first inning of potential infrastructure out performance. We see the asset class poised to regain lost ground from the previous five years and further assert its long-term historical out performance relative to global equities and bonds that we've seen over the last two decades. Periods of moderating and contracting economic growth and higher inflation have generally boded well for infrastructure out performance. Infrastructure boasts a historical track record of multiple expansion during such periods of increased uncertainty.

He also discussed the debt situation and mentioned that less than 15% of the debt is set to mature in the next 3 years, while less than 10% of the coverage universe has exposure to floating rate debt. Infrastructure companies tend to match long duration debt with long duration assets, and they feel they are well positioned with the fund portfolio to manage the sustained high cost of debt from ongoing inflation and rising interest rates.

I rate MEGI a Strong Buy at the current discount of -15.5% with a growing NAV and a healthy monthly distribution yielding almost 9% on an annual basis. Even if a recession does occur as most expect, the income is likely to continue its steady pace and may even grow over time as cash flows continue to increase with ongoing reinvestment in global infrastructure.

Editor's Note: This article was submitted as part of Seeking Alpha's Best Investment Idea For A Potential Recession competition, which runs through April 28. This competition is open to all users and contributors; click here to find out more and submit your article today!

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