Equity markets gave back some of the strong performance realized in August with the MSCI World Index declining 1.7% in September. The diversification benefits of Listed Infrastructure became clear again with the index gaining 0.9% last month. Most sectors realized positive performance with Energy Transportation companies (Pipelines) being the main outlier. The latter was down 7% in September driven by a 8% decline in oil price in the same month. The oil price was impacted by worries about the second COVID-19 wave in Europe and the US, and weakening demand as a consequence. Although the spot market exposure is limited for our pipeline companies given the long duration contracts, sentiment was weighing on valuation. Our positions in the cluster were obviously not immune, but relative performance was in line with the wider cluster.

In September, the Fund performed in line with the index (net return, Class I). As such, the c.410bps (net return) alpha which was generated YTD remained stable. Overall, the Fund is down 10.8% (net return, Class I) in the first three quarters of 2020, while still being up almost 15% since inception (or almost 9% annually).

On a stock level, the biggest positive contribution came from:
1) PSEG (20bps) which mainly operates in New Jersey. The company announced the state’s largest ever Clean Energy investment ($1bln, at 9.6% return), followed by a broker upgrade, helping the stock outperform into month end;
2) ICT (14bps) announced the first Chinese cargoes into its new Argentinian port (TecPlata). The new terminal can host world’s largest ships, first cargo was receiving auto components, and exporting beef; and
3) China Gas (11bps) for which there was no fundamental news, but some benchmark changes: it was removed from FTSE Global Core Infrastructure index, while added to HK Corporate Sustainability benchmark.

The biggest negative contribution came from:
1) Duke (31bps) gained almost 8% the last day of September as the Wall Street Journal reported that Duke received a takeover bid from NextEra. The deal would be one of the largest utility deals on record. Duke rejected the initial approach according to the article, but the FT reported early October that Duke left the door open for further discussions;
2) Vinci’s (17bps) underperformance is likely driven by the second COVID wave, resulting in softer toll road volumes and increased worries about the outlook of airports; and
3) Consolidated Edison (11bps) was upgraded by a broker mid-September, helping performance of the stock.

On Sustainability: We continued our conversation with International Container Terminals this week. The company is in measurement phase of CO2 emissions, currently able to measure emissions at 25/32 terminals. Too early for CO2 target setting, but we have already made ourselves available to the company’s ESG Committee to help with input on what appropriate targets could look like, and how to link them back to remuneration. In addition, we have started an engagement with CMS Energy to have the company’s CO2 ambitions reflected into its LTIP.

The Kempen infrastructure investment strategy strikes the balance between qualitative and quantitative analysis. Our experience and know-how in the area of infrastructure and legislation in combination with extensive data analysis, is converted into fact-based investment decision-making. Our unique valuation analysis and investment process focuses on the long-term, carefully following megatrends such as digitization, urbanization and the energy transition. Next to the quantitative approach the investment strategy contains three key qualitative parameters that determine the warranted valuation: management added value, Infrastructure regulation / quality and ESG. The portfolio managers score each company covered on these three parameters. Companies that excel in ESG for example will be assigned a higher score and hence the warranted valuation for an investment increases.

Portfolio construction of the Strategy is based on cluster neutrality. The Global portfolio has 12 clusters. Examples are Australia, NA Pipelines and European utilities. The portfolio weight of each cluster is approximately equal to the cluster’s benchmark weight. This ensures a diversified portfolio and neutralizes currency and macro-economic exposure versus the benchmark.

In September, we reduced our position in CCR to fund our investments in Rumo, both operating in Brazil.