Income Strategy August Commentary


General equities performed strongly during August, supported by ongoing easy monetary policy. Global infrastructure, including our Global Listed Infrastructure funds, underperformed general equities.
Economic data continued to show signs of a strong rebound from the COVID-19-induced lows of the second quarter, albeit the rebound continued to moderate. Infections continued to grow, although resulting mobility restrictions were targeted rather than general, thus mobility remained largely unchanged. Furlough schemes were extended in many jurisdictions and jobs data was stronger than expected. Positive news flow around vaccine development also helped buoy markets.
Monetary policy remained easy, with governments continuing to support economies. Bond rates are expected to remain low for a significant period, with the U.S. announcing an average inflation targeting framework. Concerns continue around rising inflation risk given monetary policy; however, this risk is offset by the significant slack in global economies.

Portfolio Performance

On a sector basis, North American renewable utilities were the top contributors to monthly performance (+0.77%), of which Canadian Brookfield Renewable Partners (+0.65%) and U.S. Clearway Energy (+0.23%) were the lead performers.

Brookfield Renewable Partners (BEP) is a pure-play renewables operator and developer headquartered in Canada, focused on international hydro, solar, wind and storage technology. Investors reacted positively to the acquisition of Terraform Power and the creation of C-corp shares.

Clearway Energy primarily owns and operates contracted renewable generation assets in the U.S. It also owns and operates conventional generation and thermal infrastructure assets. Shares rose on strong second-quarter results and on management announcing several growth initiatives.

Elsewhere in the region, Williams Companies (+0.15%) and Gibson Energy (+0.11%) also performed well.

Williams owns and operates natural gas pipelines and associated midstream assets in the U.S. Better than expected second-quarter results showed the business is proving more resilient to COVID-19 impacts.

Gibson Energy is an oil midstream logistics provider in Western Canada and the U.S. Gibson benefited from the S&P’s recent upgrade of its credit rating, to investment grade, which allowed it to refinance its debt at significantly lower rates and improve its cashflow by ~5% from the interest savings.

Turning to Asia Pacific, Australian airport operator Sydney Airport also performed well, contributing +0.14% to monthly performance.

Sydney Airport (SYD) manages Australia’s largest airport at a strategic and operational level under a 99-year lease. The airport operates under a light-handed dual-till regulatory framework, which allows for excess returns in the unregulated non-aeronautical operations and typically results in some excess returns in the regulated component. SYD rose during August as a result of the successful completion of its $2 billion capital raise as well as positive news flow around potential COVID-19 vaccine development.

Chilean water company Aguas Andinas was the largest detractor from monthly performance (-0.33%).

Aguas Andinas is a South American water company that supplies drinking water and provides sewerage and treatment services to residential, commercial and industrial customers in Chile. The share price of Aguas fell during the month due to poor quarterly results impacted by COVID-19. Additionally, Chile is currently experiencing its worst drought ever, which has negatively impacted Aguas’s water purchase costs.

All returns are in local currency.

Positioning and Outlook

On a regional level, the Strategy’s largest exposure is in the U.S. & Canada (35%) and consists of exposure to utilities (33%) and economically sensitive sectors (2%).

For the RARE Infrastructure Income Strategy, the primary quantitative tool in portfolio construction is Excess Return, on which our stock ranking system is based. The RARE Income Strategy also uses Yield Quality as a secondary measure.

As such, driven by valuation the Investment Committee initiated a position in U.S. electric utility Southern Company.

The fund also used the opportunity to crystallise some gains by exiting holdings in U.K. water company Pennon.

Monthly Stock Highlight

This month we review Mexican airport operator Grupo Aeroportuario del Pacífico.

Grupo Aeroportuario del Pacífico SAB de CV (GAP) is Mexico’s largest airport operator with a portfolio of 13 airports focused in Mexico’s Pacific region with an additional airport in Jamaica.

GAP’s airport portfolio operates under long-term concession contracts with revenues regulated under a dual-till system. Under this regulation, GAP recently concluded a highly lucrative Master Development Program (MDP) allowing for a generous increase in tariffs over the next five years.

Unfortunately, like all airports, GAP has seen passenger traffic negatively impacted by the recent pandemic. With COVID-19 front of mind, GAP emerges as one of the more lucrative airports due to its exceptionally strong balance sheet position. Recovery across GAP’s airports has surpassed global peers with recent passenger data outperforming international peers by 10%+. Should this trend continue, GAP should materialize as one of the fastest-recovering airport groups.


Related RARE Insights

Why consider RARE?

RARE's investment approach to our actively managed strategies uses a bottom-up, fundamental analysis in our research process, undertaken within a rigorous analytical framework.

Discover the key features of our approach