On the 22nd of January 2021, RARE Infrastructure Limited changed its name to ClearBridge Investments Limited.

Income Strategy December Commentary

Overview

Our Global Listed Infrastructure funds performed strongly in the fourth quarter and in line with both infrastructure and global equity indexes, which rose handily as two effective vaccines for COVID-19 and their subsequent approval for use in many countries raised expectations of a strong recovery in 2021.

The vaccine announcements raised hopes for higher economic growth as well as a return for travel and leisure, lifting cyclical areas of the market and economically sensitive user pays infrastructure assets. Renewables continued their strong performance, while energy rebounded.

The quarter saw a gradual reduction in political uncertainty as Joe Biden won the race for U.S. president and will govern with a small majority in Congress and the Senate. The lack of an overwhelming Democratic mandate could remove the near-term risk of structurally higher taxes and more stringent regulation.

Stimulus remained front and centre: the EU approved a €1.8 trillion stimulus plan and agreed to more aggressive cuts in greenhouse gas emissions over the next decade as it aims to be the first climate-neutral continent. The U.S. also passed another stimulus package, focused on delivering USD$900 billion in support with a focus on consumers, small businesses and vaccine distribution.

Hard economic data showed signs of slowing as unemployment levels remained elevated, albeit softened by support from government stimulus and job support programs, as well as accommodative monetary conditions.

Portfolio Performance

On a regional basis, North America was the top contributor to quarterly performance (+4.94%), of which Canadian renewables utility Brookfield Renewables Partners (+1.85%) and U.S. renewables utility Clearway Energy (+0.86%) 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. Brookfield announced accretive acquisitions during the quarter that were well-received by the market.

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 were higher as the company announced additional growth opportunities (~2200 MWs) along with positive datapoints on its near-term contract expiry of California gas assets, in particular the sale of similar assets by AES at high multiples.

Turning to Western Europe, Portuguese renewables utility Energias de Portugal (+0.82%) and U.K. electric utility SSE (+0.75%) also performed well.

Energias de Portugal (EDP) is an integrated utility based in Iberia, operating electricity distribution, generation and energy supply businesses. It has a growing exposure to global renewables through its 83%-owned subsidiary EDPR (mostly onshore wind farms) and operates electricity distribution and generation businesses in Brazil through its 50%-owned EDP Brasil. Gains were mainly driven by the company’s 9M results beating expectations and its raising full-year guidance. In addition, strengthened commitment by the European Commission to reduce carbon emissions as well as positive federal policies under the newly elected U.S. president Biden also boosted sentiment for the renewables sector.

SSE is a diversified energy utility headquartered in Scotland. It is vertically integrated, operating over the entire supply chain in the U.K., with generation (including hydro, wind, CCGT and coal-fired), electricity and gas networks, and retail businesses. It is the U.K.’s largest renewable energy generator. The company raised the FY EPS guidance on the back of its Dogger Bank wind project farm-down. Its announced upstream gas asset disposal also marked further progress in its asset recycling program. Furthermore, Ofgem’s regulatory reset in December, coupled with the U.K.’s Energy White Paper and Green Industrial Revolution Plan, provided a supportive backdrop for SSE’s core network and renewables businesses.

Canadian gas utility TC Energy was the largest detractor from quarterly performance (-0.23%).

TC Energy (TRP) is a high-quality North American energy infrastructure company leveraged to the natural gas growth thematic. Joe Biden winning the U.S. federal election increased risk to TRP’s Keystone XL pipeline project, as Biden has previously warned that, if elected, he will cancel the presidential permit for the project.

All returns are in local currency.

Positioning and Outlook

On a regional level, the Strategy’s largest exposure is in the U.S. & Canada (37%) and consists of exposure to regulated and contracted utilities (32%) and economically sensitive user pays infrastructure (5%).

For the Global Infrastructure Income Strategy, the primary quantitative tool in portfolio construction is Excess Return, on which our stock-ranking system is based. The Global Infrastructure Income Strategy also uses Yield Quality as a secondary measure. As such, driven by valuation, the Investment Committee initiated positions in Canadian gas utility TC Energy and U.S. electric utility Exelon Corporation.

The fund also used the opportunity to crystallise some gains by exiting U.S. electric utilities Dominion Energy and Duke Energy, U.K. water utility Severn Trent and Italian gas utility Italgas.

Quarterly Stock Highlight

This quarter we review Brazilian electric utility Transmissora Alianca De Energia Eletrica S.A. (TAESA).

TAESA is a pure play transmission company in Brazil. TAESA operates approximately 9,803 km of transmission lines and 69 substations.

TAESA operates transmission lines under 30-year concession contracts with inflation-linked revenues. Most of TAESA’s lines do not face periodic tariff revisions, virtually eliminating the already low regulatory risk.

We continue to have a positive view of TAESA as the company benefits from improved attractiveness in the Brazilian electricity transmission sector plus a lower interest rate environment in Brazil (benefiting bond proxies such as TAESA and other electric transmission names).

Over the next five years we expect TAESA to execute on transmission expansion projects, which will enable the company to retain its ability to pay a high and growing dividend.

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