Although infrastructure assets have fared well during the past decade, last year was a difficult year for the sector following the rise in real bond yields, which meant that the sector underperformed the broader equity market.
However, there are reasons to believe that this performance will be just an aberration as previous periods of yield-driven volatility that led to an underperformance in infrastructure returns such as in 2018 have generally been followed by sharp rallies in infrastructure assets.
Moreover, infrastructure assets stand to benefit from the current environment, due to their low sensitivity to GDP growth and their ability to increase cash flows to buttress against inflation, at least in the more regulated sectors.
In addition, a number of short-term trends favour allocation to listed infrastructure at the moment, notably the wide trading discount that currently exists between listed assets and their unlisted peers.
Meanwhile, over the long term, the broad themes of decarbonisation, reshoring and 5G growth are also sources of attractive opportunities in the listed infrastructure space.
Against this background, Darius McDermott, managing director at Chelsea Financial Services, chose the M&G Global Listed Infrastructure fund and the Morgan Stanley Global Infrastructure fund for this week’s head to head.
| M&G | Morgan Stanley | |
| Size | $523.8m | $800.1m |
| Inception | 2017 | 2012 |
| Managers | Alex Araujo | Matthew King |
| Three-year cumulative return | 5.36% | 2.28% |
| Three-year annualised return | 5.17% | 2.14% |
| Three-year annualised alpha | 1.73 | -0.92 |
| Three-year annualised volatility | 12.77 | 15.26 |
| Three-year information ratio | 0.45 | -0.1 |
| FE Crown fund rating | *** | **** |
| OCF (retail share class) | 1.19% | 1.04% |
Investment approach
The M&G fund invests across three key areas, namely economic, social and what it terms ‘evolving’ infrastructure, essentially things like communications and royalties. It is the latter that distinguishes the fund from many of its competitors, according to McDermott.
“The M&G fund invests in more than just the traditional areas. The modern infrastructure investments such as payment companies and data centres differentiate the fund against its peers,” he said.
The portfolio comprises around 40 to 50 different holdings, with the fund employing a buy-and-hold strategy. As well as targeting issuers in the three aforementioned sectors, the fund also looks at companies that pay some level of dividend and have a market capitalisation of over $1bn. It excludes coal and nuclear power companies entirely.
Meanwhile, the Morgan Stanley fund comprises a mixture of both top-down and bottom-up research and instead of emphasising income and dividend yield, it focuses on the overall total return.
“The M&G fund invests in more than just the traditional areas. The modern infrastructure investments such as payment companies and data centres differentiate the fund against its peers.”
darius mcdermott, chelsea financial services
The fund looks at six characteristics when deciding on investments, namely holdings that are essential to society or to the economy, operate in a regulated environment, have regularity of cash flows often linked to inflation, resistance to business cyclicality, high barriers to entry, and have long and useful lives.
McDermott notes that both funds are characterised by their active nature, with only one commonality within their top 10 holdings, namely American Tower Corporation, while the Morgan Stanley fund has a higher exposure to the US than the M&G fund.
Country allocation:
| M&G | Morgan Stanley | ||
| US | 42.1% | US | 48.13% |
| Canada | 17.6% | Canada | 19.23% |
| UK | 13.5% | Spain | 7.83% |
| Italy | 7% | UK | 7.01% |
| France | 3.9% | France | 4.77% |
| Guernsey | 3.5% | Italy | 3.32% |
| Australia | 3.1% | Australia | 2.75% |
| Germany | 2% | China | 2.47% |
| Other | 5.9% | Mexico | 2.11% |
| Cash | 1.4% | Other | 1.78% |
| Cash | 0.62% |
Sector allocation:
| M&G | Morgan Stanley | ||
| Utilities | 31.1% | Oil & Gas Storage & Transportation | 32.84% |
| Communications | 16.4% | Communications | 17.68% |
| Social | 15% | Electricity Transmission & Distribution | 13.2% |
| Transport | 13.5% | Diversified | 12.4% |
| Energy | 13.5% | Others | 8.96% |
| Royalty | 6.1% | Airports | 5.83% |
| Transactional | 3% | Water | 4.99% |
| Cash | 1.4% | Toll Roads | 3.52% |
| Cash | 0.62% |
Performance
McDermott notes that both funds have produced similar returns in recent years, underscoring the extent to which the sector can thrive during an inflationary backdrop.
The M&G fund is benchmarked against the broader global equity sector, meaning that there will naturally be some underweights to unrelated sectors such as consumer spending, although McDermott notes that the fund does hold some payment companies.
The fund targets around 3-4% yield, with around 5-10% in growth, meaning it aims for an all-in total return in the high single digits.
Meanwhile, the Morgan Stanley fund has a low turnover, with the managers opting for securities that work well in both strong and weak macro environments.
McDermott notes that both funds recorded their best ever years in 2019 with the M&G fund up 32%, while the Morgan Stanley fund rose 24%.
Regarding fees, he notes that both are fairly priced for the asset class, albeit the Morgan Stanley fund is slightly cheaper.
Discrete calendar year performance
| Fund | YTD* | 2023 | 2022 | 2021 | 2020 |
| M&G | -2.97% | -0.22% | 3.33% | 15.38% | 1.27% |
| Morgan Stanley | -2.93% | 3.2% | -7.97% | 13.68% | -1.9% |
Manager review
The M&G fund is led by Alex Araujo, who joined the firm’s equity team in 2015 and became co-deputy manager of the M&G Global Dividend strategy the following year.
He has been manager of this fund since its launch in 2016. He has 25 years of experience, working previously for UBS and BMO Financial Group.
The Morgan Stanley fund is led by Matthew King, who joined the investment manager in 2008. He is lead portfolio manager for the firm’s global infrastructure securities platform, having co-founded the strategy in 2010.
He is also a lead portfolio manager for the firm’s energy transition and innovation opportunities platform.
Conclusion
Overall, McDermott says he likes both funds, although he singles out the M&G fund for praise.
“Both have produced strong returns, but we do like the breadth of investments the M&G fund focuses on. The goal of the fund is to outperform global equities. As such, finding a premium income isn’t hard – but an alternative income of around 3.5% is not to be sniffed at from the asset class. This coupled with strong performance makes it a good income alternative for investors,” he said.
