Ausbil Global Essential Infras Wholsl (AAP3254AU) Report & Performance

Fund performance for the quarter ending December 2022 was +4.88% (net of fees) versus the benchmark return of +3.22%, as measured by the OECD G7 CPI Index plus 5.5% pa. After the rebound in October and November, markets initially continued to rise in December, before selling off in the second half of the month.

The main driver for the sell-off was a combination of hawkish updates from both the US Federal Reserve and the ECB. These extinguished hopes of early interest rate cuts in 2023 and the market sold off as a result. The Fed now expects to keep interest rates higher in 2023, with no cuts expected until 2024. Given the broad sell-off in equities during December, infrastructure was not immune. All major sectors and regions of Essential Infrastructure fell during the month. Energy Infrastructure led the decline, falling close to 6% on average, followed by Transportation Infrastructure at just under 5%. Both of these sectors fell due to increased concerns over a recession in 2023. Utilities (-2.2%) and the UK in particular (-1.8%) were areas of relative strength. Looking at individual names, recent addition to the Fund, Exelon, a US electricity and gas utility was the biggest gainer adding 4.5%, and rebounding well from recent lows that provided an excellent entry point.

Elsewhere, Ørsted, the global leader in offshore wind rose 1.7%. We continue to view renewable energy as an attractive secular growth trend, driven by the Inflation Reduction Act (IRA) in the US and also the repowering of Europe away from Russian gas towards renewables. We also note the potential passage of a Canadian carbon copy of the US IRA in the first half of 2023, which would underpin increased development of renewable energy in that country.

The biggest faller in the Fund was French airport group ADP, which fell 14.7%, closely followed by LNG terminal company Cheniere at 14.5%. Both of these companies fell on bearish economic sentiment for 2023. We continue to see good opportunities in both of these stocks. Cheniere is benefitting from multi-decade contracts that secure cashflow for many years to come, whilst ADP is seeing a strong traffic recovery, which is nearly back to pre-Covid levels.

Fund performance for the month ending November 2022 was +3.47% (net of fees) versus the benchmark return of +1.06%, as measured by the OECD G7 CPI Index plus 5.5%. Markets continued to rebound in November, as inflation showed signs of easing around the world. This increased hopes that the Federal Reserve would slow the pace of interest rate hikes despite a continued hawkish stance by several voting members of the FOMC. This in turn led to weakening in the US dollar, and for the US yield curve to invert further. Employment in the US, a key metric for the Fed, remains stubbornly strong and needs to soften over the coming months for the Fed to change its hawkish stance.

During the month, infrastructure was buoyed by the positive sentiment and performed well across all major sectors and regions. Longer-dated assets such as Communications (+9%) and Utilities (5.6%) performed strongly. Utilities in the UK rose 9% on the back of a relief rally and a fiscally prudent mini-budget that was an almost complete U-turn from the Liz Truss/Kwasi Kwarteng budget just 2-months prior. Looking at individual names, German company Vantage Towers was the best performer (+15%) in the month, rising strongly on the back of a takeover bid. This confirms our view that mobile-phone tower companies are trading at a steep discount to where the private market sees valuations. SBA Communications in the US, another mobile-phone tower operator, also performed strongly, rising 11%. There was also a healthy group of utilities that all rose around 10% in the month. Names like Terna in Italy, Sempra, NextEra, Ameren and Centerpoint, all in the US, reflected broad strength across the sector. On the negative side, renewable energy company Acciona Energia fell 5% after a very strong recent run. Strangely, in our view, Spanish mobilephone tower company Cellnex fell 1% despite the positive sentiment to these assets and also the company announcing a very disciplined pivot away from acquisitions and towards increasing balance street strength. We see this as a positive move and we continue to like the name.

Fund performance for the month ending October 2022 was +5.56% (net of fees) versus the benchmark return of +1.09%, as measured by the OECD G7 CPI Index plus 5.5%. Markets rebounded strongly in October on the back of a positive start to the earnings season, against relatively low expectations and depressed market sentiment. All eyes remain focused on the actions of central banks globally, as the market looks for signposts that the current pace of tightening could slow.

Globally, the war in Ukraine continues, with the team monitoring the broader implications for the fund. We also saw the end of Liz Truss’ tenure as Prime Minister in the UK (just 44 days in office) after her plan to debt-fund tax cuts sent financial markets and the sterling into a steep decline, and UK bonds on to a post-financial crisis high before the plan was pulled. Rishi Sunak was elected as Prime Minister by conservative MPs and his first task is to try and steady the party, the economy and the markets.

During October, all sectors and regions of infrastructure were positive with the Energy and Transportation sectors leading the group. Energy infrastructure companies Williams (+14%) and Cheniere (+6%) were up strongly while European airport operators ADP and AENA were up 15% and 11% in local currency, respectively. The main detractors in the period were the larger cap, long duration equity holdings as small cap and value factors led the way. US mobile phone tower companies SBA Communications (-5%) and American Tower (-3%) along with US utility NextEra Energy (-1%) all traded lower in the period. These three companies are all high quality with a strong secular growth tailwind and remain core positions in the fund.

Fund performance for the quarter ending September 2022 was -4.10% (net of fees) versus the benchmark return of +3.26%, as measured by the OECD G7 CPI Index plus 5.5%. Markets sank in September on the back of a combination of events around the world. Inflation remains stubbornly high and the Federal Reserve reiterated its hawkish stance to the disappointment of the market.

The Fed raised interest rates by 75bps in September and other central banks followed suit – the Bank of England raised by 50bps and the ECB raised by 75bps. However, future inflation expectations reduced as markets assumed an increased probability of recession around the world. To make matters worse in the UK, the new Chancellor of the Exchequer sent markets into a spin and the sterling to an all-time low after announcing a fiscal package that was poorly received. This wave of negative sentiment affected all equity markets, and infrastructure was not immune from the fallout. We have seen this scenario several times in the past, and what we have experienced is that infrastructure tends to recover quicker than broader equities from kneejerk sell-offs.

This is primarily due to investors ultimately recognising the resilience of cash flows and profits of infrastructure companies. Whether this happens this time round remains to be seen, but we remain confident in the high-quality defensive companies we have in the Fund. During September, although all sectors and regions of infrastructure fell sharply, it was the more interest-sensitive sectors such as utilities and mobile phone tower companies that suffered the most. Spanish tower company Cellnex was the biggest faller in the Fund, tumbling 18%, with Belgian electricity transmission company, Elia falling 17% and offshore wind leader Ørsted down 16%. UK names such as water companies Pennon and Severn Trent both fell over 15% during the month as investors gave a big thumbs down to the government’s new fiscal package.

On the positive side for the month, US LNG export name Cheniere continued its strong run. The company raised guidance for the year by 12%, increased its dividend by 20%, increased its buyback plan from $1bn to $5bn and lowered its long-term leverage target. Despite this combination of positive news, the share price only managed to climb 3% during September. Elsewhere, German mobile phone tower company Vantage Towers rose over 2% as rumours swirled of Private Equity players eyeing a stake. This is not a surprise, in our view, given that listed European tower companies are trading on around half the multiples that similar assets have recently traded at in the private market

Fund performance for the month ending August 2022 was -2.16% (net of fees) versus the benchmark return of +1.15%, as measured by the OECD G7 CPI Index plus 5.5%. The global equity market roller coaster ride continued in August, with a reversal of the strong recovery made in July. In his much-anticipated annual policy speech at Jackson Hole, US Federal Reserve Chair Jerome Powell affirmed the need to continue fighting inflation. Expectations for a pause and reversal in interest rate hikes are now very much diminished until inflation moves down closer to the Fed’s 2% long-range goal. The Fed’s hawkish tone at Jackson Hole caught bond and equity markets off guard, and the longer duration sectors within listed infrastructure were negatively impacted. Markets were also impacted in August by continuing European energy supply woes, with Russia limiting supplies and concerns around storage levels heading into the northern hemisphere winter driving prices higher.

At month end, it appears that the European Union is preparing to intervene in order to bring some relief to the soaring power costs for consumers. Essential Infrastructure exhibited its defensive characteristics during the month, falling far less than global equities. On the positive side, US LNG export operator Cheniere Energy was the best performer, rising over 9% as it provided a positive update to full-year guidance and submitted a regulatory filing for an expansion project at its Corpus Christi liquefaction facility.

Renewable names Ormat and NextEra also rose during the month on the back of the US Inflation Reduction Act being passed, which has positive implications for clean energy companies. On the negative side, European offshore wind operator Ørsted was the weakest name in the portfolio falling over 13% after a poorly received quarterly update. We continue to view the company positively over the long term and we added to the holding on weakness. Additionally, European mobile phone tower companies Cellnex and Vantage both fell over 10% during the month on higher interest rates and recession concerns.

Fund performance for the month ending July 2022 was +5.32% (net of fees) versus the benchmark return of +1.03%, as measured by the OECD G7 CPI Index plus 5.5%. After the savage drawdown in global equity markets in June, equity markets staged a strong recovery in July. Bond yields declined rapidly following their meteoric rise in the preceding period as bond markets seemingly started pricing in an increased chance of a recession with the yield curve inversion steepening across most markets. Essential Infrastructure also performed strongly during July. The moves in bond yields in July together with continued high inflation prints in developed markets, provided a solid back drop for the asset class. Over the course of 2022, Essential Infrastructure has displayed its defensive characteristics and low downside capture but, in case of July, its ability to also capture upside when equity markets rise.

During the month, mobile tower company Cellnex Telecom rose 18% after the company revealed it had withdrawn from the bidding to acquire Deutsche Telecom’s tower assets in Germany and Austria. Given the structure of the proposed transaction, we viewed Cellnex’s withdrawal positively demonstrating its disciplined approach to M&A – and the equity market appeared to take a similar view!