Infrastructure Goldilocks: Stimulus, Sustainability and Inflation protection

Tune into our webinar

The announcement by US President Joe Biden of massive investments to improve the country’s infrastructure and hasten its transition to clean energy has hit the headlines: with around USD 2 trillion of planned expenditure, the US government has put infrastructure firmly under the spotlight. But the infrastructure story isn’t reliant on one act by the US government. At Kempen we believe it’s a multi-decade secular growth theme that offers compelling opportunities for investors. But where are the best investment opportunities as we gradually emerge from the pandemic into what could be the new normal? 
Want to find out how an allocation to the asset class could benefit your portfolio? What our views are on the prospects of listed infrastructure and how to contribute to the energy transition?
Please register here for our webinar on Friday 2 July. 

Seeking out the best listed infrastructure opportunities in the post-pandemic world

At Kempen we invest in three areas of listed infrastructure: transport, communications and energy. Over the past year there’s been a marked divergence in the returns of firms involved in these different sectors because of the unique circumstances presented by the pandemic: most notably, transport has suffered as people have been forced to stay at home, while communications has prospered with everyone spending more time more online.

But where do the best opportunities now lie as we gradually emerge from the pandemic into what could be the new normal? Let’s take a look in the final blog in this series. 

Divergent fortunes within transport
Airports suffered badly last year, with the number of flights down by around 95% in the first lockdown. However, the situation since then has improved gradually, and the success of vaccination campaigns has resulted in flight capacity shooting up over the past few weeks – albeit from an arguably low base.

But there are regional differences. China is leading the pack, with some of the country’s tour operators nearly back to 2019 levels. Flights in the US are also recovering strongly, but Europe is lagging behind.

We’re carefully considering how quickly air traffic is likely to normalise. With holiday season nearly upon us, plans for vaccine passports afoot and huge pent-up demand, many people are going to be desperate to get away this summer. We’re expecting airports focusing on short-haul flights to recover first, with a normalisation in long-haul flights somewhat further away. Another concern is that there’s likely to be much less business travel – the most profitable area for airports – going forward as a result of the pandemic.

We’ve gradually increased our exposure to airports since last summer. We’re focusing mainly on airports in emerging markets that are driven primarily by domestic demand, and we also have exposure to the US. In Europe, we have exposure to some airports in Portugal, which is a preferred destination for many European holidaymakers.

Away from airports, we hold operators of French toll roads, which should benefit from people from northern Europe driving to the south of France over the summer. We also invest in a number of attractively valued firms that own Chinese toll roads. 

Digital infrastructure set for a multi-decade rerating
Digital infrastructure performed strongly last year as demand for data skyrocketed as people spent more time at home. But we believe it still has considerable scope to rise further: as we explained in our first blog, it looks set for a multi-decade rerating.

Owners of communications towers look particularly attractive to us. These firms have long-term contracts with escalators that are often linked to inflation – an attractive proposition in the current environment, with investors concerned about inflation making a return. What’s more, demand for data looks set to increase dramatically over the next decade with the move from 4G to 5G. In our view the stock market rotation at the start of the year created a good opportunity to increase exposure to some firms in this area, which is exactly what we did.   

The best way to access the energy transition
Seemingly the most obvious way to help fund the energy transition is by investing in pure ESG stocks like offshore wind producers. However, they have performed very well in recent years and as we stated in our investment outlook at the start of the year, they were looking very expensive. Since then, some have derated, falling by 20–30%1. Even though their valuations are now looking fairer, we still see few attractive opportunities in this area.

We prefer to access the energy transition by investing in vertically integrated utilities and grid operators, as their valuations are more attractive and we believe that the role such firms have to play in the energy transition and the required capex is not yet fully reflected in their valuations. In our view, they have attractive return potential. 


 1.Kempen, FactSet June 2021

download the article

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is prepared by the fund managers of Global Listed Infrastructure (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might hold position in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

The value of your investment may fluctuate, past performance is no guarantee for the future. Do not take unnecessary risks. Before you invest, it is important that you are aware of and are informed about the characteristics and risks of investing. This information can be found in the available documents of the strategy and/or in the agreements that are part of the service you choose or have chosen.

A forward-looking approach to sustainability

When we’re deciding which firms to invest in for our global listed infrastructure strategy we focus on three criteria, placing equal emphasis on each: the quality of the assets they own, the quality of their management team and their ESG credentials. With ESG as a key part of our investment process, we aim to invest in companies that are making a difference, which in turn helps us generate sustainable investment returns for our clients and create a better world.

Let’s take a look at our approach to ESG.

Always forward-looking
Our global listed infrastructure strategy invests in companies involved in three main areas: energy, transport and communications. Energy utilities clearly have a big role to play in the energy transition, as recent US data show that 25% of CO2 emissions are from utilities1, so allocating capital appropriately can result in significant reductions in carbon emissions. 

While many asset managers are now focusing on ESG issues, we believe we stand out from the crowd in the way we look into the future and recognise the sustainability journey that companies are on rather than adopting a short-sighted focus on the current situation. Recognizing the CO2 trajectory, and holding management accountable, will make a difference, while we believe this also helps us generate sustainable financial outperformance over the long term.

A good example of this approach is Xcel Energy. According to EU Taxonomy definitions this US utility wouldn’t currently be considered a sustainable investment due to the proportion of energy it produces from burning coal. However, we wouldn’t rule it out as an opportunity as we believe its current emission profile doesn’t paint an accurate picture of the firm’s sustainability journey.

That’s because Xcel Energy has already demonstrated its ability to reduce its emissions from 2005 levels, and it has a clear roadmap to decarbonise further: it has plans in place to reduce CO2 emissions by 85% by 2035 and to be net-zero by 2050. This is to be achieved by closing down coal facilities and replacing them with renewables. These targets form an important part of its management team’s long-term incentive plan and the company is providing good visibility about its future plans.

Figure 1: Xcel Energy Carbon Reduction Trajectory

Source: Xcel’s investor presentation, Feb-2021

Not just focusing on the E

With the world in the midst of a climate crisis, it’s unsurprising that many investors are focusing on the E of ESG at present. But we believe this is a mistake – the social side in particular is also very important. 

Utilities such as Xcel Energy that are transitioning away from fossil fuels are going to need to fund their investments in renewables, and that inevitably means higher energy bills for their customers. So it’s important that these firms spread out the increases over several years to limit the impact, especially on their most vulnerable customers. 

Another consideration is that the transition to renewables is going to affect employment: wind and solar farms need fewer staff to operate them than coal-burning power stations. We engage with the firms involved to make sure they have plans in place to help employees move to different roles within their company or receive training to help them find alternative employment.

The power of engagement
At Kempen, ESG isn’t just a box-ticking exercise: we also engage with companies to urge them to improve their practices. We focus primarily on sector-wide engagements, but there are some good examples of how we’ve persuaded individual firms not to invest in coal facilities. 

For instance, at the start of 2019, CLP Holdings, one of the largest investor-owned power businesses in Asia-Pacific, announced plans to build two new coal facilities in Vietnam. We engaged with the firm, urging it to focus on alternatives like building renewables facilities or return capital to shareholders if there were no good opportunities to do so. We were delighted that at the end of 2019, the firm announced a new decarbonisation roadmap and confirmed that it would not construct the new coal facilities. 


 1.https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions, 2019

download the article

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is prepared by the fund managers of Global Listed Infrastructure (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might hold position in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

The value of your investment may fluctuate, past performance is no guarantee for the future. Do not take unnecessary risks. Before you invest, it is important that you are aware of and are informed about the characteristics and risks of investing. This information can be found in the available documents of the strategy and/or in the agreements that are part of the service you choose or have chosen.

An investment process that’s driven by data

The amount of data the world is creating has exploded in recent years. Data analysis has huge potential to inform investment decisions, but that’s easier said than done. Not all data is useful, so it’s vital to identify which data points are relevant for each investment case. 

We manage our global listed infrastructure strategy according to a bottom-up approach, picking stocks based on our fundamental analysis. But data plays a big role in increasing the efficiency of our process, helping us identify opportunities more quickly and informing our discussions with company management teams so we can be sure we’re asking them the right questions. It also helps us identify risks that companies might be exposed to.

Taking data usage to the next level
Of course, other companies use data in their investment processes too, but we believe the granularity of the data we use sets us apart, as does the way we are able to visualise it through customised dashboards, especially at the asset level. This makes it easy to link our data analysis into our investment process and valuation models. 

A worthwhile investment
Our global listed infrastructure strategy has strongly outperformed its benchmark since we launched it at the start of 2019. There are a number of reasons for this, one of which is the unique way in which we use data in our investment process. 

Finding the right data requires a big investment of time and money – there’s a lot of trial and error involved, and the data has to be cleaned and verified. You’ve also got to know what you’re looking for if you want to find the right data to help you value companies accurately, but if you get it right it has big benefits. 

Let’s take a look at some examples of how we use data in our investment process.

Identifying potential opportunities to transition to renewables
With the world looking to rapidly decarbonise, many utilities are transitioning from fossil fuel power generation to renewable energy. We use weather data from bodies such as NASA, the US government and the UK and German weather authorities to identify firms with fossil fuel plants in very sunny or windy areas that could be transitioned into solar power or wind farms. Again, we discuss our findings with management teams, highlighting what we believe to be the best opportunities.

We can even use data about political preferences to inform our decisions. For example, in the US, new renewables farms are more likely to be approved in Democrat-leaning areas, which are on average more inclined to support the transition to clean energy than Republican regions. 

Source: SNL, National Weather Service, Kempen, May-2021

Identifying physical risks

Data can also help us identify physical risks that potential holdings might be exposed to. For example, we look at where the main weather-related risk events, such as flooding and wildfires, occur and plot them against existing infrastructure assets such as railways, communications towers and power plants. This enables us to determine the main climate-related risks that infrastructure firms are exposed to.

If all else is equal between two firms, we’d invest in the firm with assets in a lower-risk area. But if the valuation of the higher-risk company reflects the risks it’s exposed to, or discounts them more than we believe is appropriate, it could still represent a good investment opportunity. Before investing, we would make sure we discuss the risks with the management team to ensure they’re addressing it properly and seeking to mitigate any risks.

Source: SNL, Federal Emergency Management Agency, Kempen, May-2021

Identifying which transport assets are recovering after the pandemic

Companies involved in transportation infrastructure form an important part of our investment universe. As everyone knows, transportation took a hit during the lockdowns, but it’s now on the road to recovery as economies gradually reopen. Looking at data can tell us which assets are recovering fastest.

For example, as well as looking at the number of cars on toll roads, we’re analysing airport passenger numbers to determine the pace of the recovery. We do not rely solely on the traffic figures reported by companies, looking at traffic data from multiple sources. We measure these figures against vaccination roll-outs and lockdown measures. With traffic having recovered quicker in the US given the success of its vaccination strategy, we use that data to calibrate our European traffic forecasts as the vaccine roll-out continues in European countries.

Source: Ourworldindata.org, Kempen, May-2021

download the article

Tune into our webinar

To find out more about the unique way in which we use data in our investment process and lots more about our global listed infrastructure strategy, please register here  for our webinar on Friday 2 July.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is prepared by the fund managers of Global Listed Infrastructure (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might hold position in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

The value of your investment may fluctuate, past performance is no guarantee for the future. Do not take unnecessary risks. Before you invest, it is important that you are aware of and are informed about the characteristics and risks of investing. This information can be found in the available documents of the strategy and/or in the agreements that are part of the service you choose or have chosen.

How can you capitalise on the world’s need for infrastructure?

The recent announcement by new US President Joe Biden of massive investments to improve the country’s infrastructure and hasten its transition to clean energy has hit the headlines: with around USD 2 trillion of planned expenditure, the US government has put infrastructure firmly under the spotlight.

But the infrastructure story isn’t reliant on one act by the US government. At Kempen we believe it’s a multi-decade secular growth theme that offers compelling opportunities for investors to capitalise on the need for new and improved infrastructure across the world.

The Biden plan
Even though the US remains the wealthiest country in the world, it’s ranked just 13th in terms of the quality of its infrastructure. The Biden administration sees investing in infrastructure as a way to kick-start the US economy, reduce carbon emissions and improve the lives of the American people. 

With this in mind, at the end of March the US government announced its USD 2 trillion American Jobs Plan, which includes some eye-catching infrastructure spending announcements and encompasses a wide range of themes. In addition to spending on traditional infrastructure projects such as water systems and bridges, there’s going to be major investment in modern requirements such as the transition to clean energy and making 5G available to every American. Huge sums of money will also be needed to make existing infrastructure more resilient to increasingly prevalent natural disasters such as floods and wildfires.

But the US government’s investments alone won’t be enough to make the Biden plans a reality: private capital will also be needed. Many listed companies will be keen to get involved in the projects, creating a broad array of opportunities for investors.

Not all about the US 
Biden’s plans for US infrastructure are of course big news, but the need for new and improved infrastructure is a global story, spanning developed and emerging markets alike. 

For example, Europe and China have already signed up to stringent carbon emissions targets, while China has already embarked on its own ambitious infrastructure project in the form of the Belt and Road initiative, which is investing in around 70 countries and international organisations. Meanwhile, the transition from 4G to 5G will take place across the globe, meaning more communications towers and data centres will be needed the world over.

A compelling opportunity
At Kempen we believe that by allocating to listed infrastructure companies, investors can capitalise on the growth potential of a number of megatrends shaping the world – most prominent among them the low-carbon transition, digitalisation and globalisation. Because of these megatrends and the world’s growing, ageing population, it is estimated that some 75% of infrastructure that will be in place by 2050 doesn't exist today. 

Even though listed infrastructure is a fast-growing sector, direct investments in infrastructure are currently trading at a premium to listed companies of around 20–50% based on transactional evidence1. That’s in large part because the price of direct investments has been pushed up by investors such as pension funds and insurance companies searching for yield. The significant discount the listed sector is trading at it should offer it support. 

What’s more, listed infrastructure is also looking attractive relative to the broad equity markets based on historical dividend yields and EV/EBITDA2. So even though there’s a lot of talk about infrastructure at present and it’s on a multi-decade growth path, in our view it’s by no means too late to allocate to the asset class.

That said, we believe it’s vital to adopt an active approach to listed infrastructure, only investing in companies with attractive risk-return potential, strong diversification characteristics and that benefit from a supportive regulatory backdrop and limited sensitivity to fluctuating commodity prices.

download the article


1 Source: Kempen, GLIO, press releases, May 2021
2 Source: Kempen, Factset, May 2021

Tune into our webinar

Kempen is the first Dutch asset manager to invest in listed companies that manage and own infrastructure. We have a strong track record and considerable know-how in managing a broad range of real assets, including global listed infrastructure, using a unique data-driven approach to valuation. 

Do you want to find out more about our views on the prospects of listed infrastructure, how an allocation to the asset class could benefit your portfolio and how we invest in it while taking ESG factors into account? If so, please register here  for our webinar on Friday 2 July.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and is authorised to provide investment services, and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, investment recommendations, research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views only at the date of issue. These may be subject to change at any given time, without prior notice.

Additional information

Infrastructure as inflation hedge

The listed infrastructure asset class is exposed to secular growth themes around sustainability, digitalization, and the emerging market middle class. The sector benefits from predictable cash flows and tangible assets. One characteristic of this asset class that had not received much attention in the past is the inflation protection by nature of its contracts. As inflation concerns return we expect the sector to demonstrate its resilience.

download

Infrastructure is key in a sustainable world

Over the past decade there has been an increasing focus on Sustainability issues impacting society. We believe the coming decade will see a step change in Sustainability issues. In this paper we outline this change, the role of Infrastructure, and how our investment process captures the opportunities ahead.

download

Hidden in plain sight

Infrastructure assets are in vogue: Duke Energy partners sold a minority interest in Duke Energy Indiana at a premium to GIC. IFM offers EUR 5bn for 23% stake in Naturgy Energy at a 20% premium to latest share price. These are just two of the deals that were announced in the first month of the year. Evidently, the lower cost of capital and wall of money have pushed up valuations in the private market - well ahead of the listed market.

download

Infrastructure review & outlook

Volatility turned into alpha: a challenging 2020 for the infrastructure sector.

download

How inflation-proof is infrastructure?

Economies are progressively reopening thanks to rising vaccinations. Monetary and fiscal policy remains accommodative. Hence, investors’ worries about inflation are reignited: bond yields have traded higher recently and breakeven inflation has increased to 2.5%. For investors the question is: how to protect investment portfolios if inflation would remain persistently high going forward?

download