In the first quarter of 2021, RARE Infrastructure will be changing its name to ClearBridge Investments Limited.

Income Strategy October Commentary

Overview

October was characterised by increasing uncertainty versus recent months, albeit global economic activity was significantly more robust than in the initial COVID-19 period. Hard economic data was strong, although forward indicators showed a less buoyant outlook. COVID-19 cases spiked in key regions, particularly Europe as a second wave of infections spread, resulting in the re-introduction of mobility restrictions. Whilst monetary policy remained easy, deployment of fiscal stimulus stalled, with the U.S. failing to pass further measures and a delay in the implementation of the EU Recovery Fund. Finally, political uncertainty remained elevated ahead of the U.S. election and amidst ongoing global political tensions with China.

Governments remain committed to supporting COVID-19-ravaged economies, supporting an outlook of easy monetary policy and low bond rates. Policy makers’ commitments to decarbonisation continued, supportive of infrastructure companies involved in the energy transition.

Portfolio Performance

On a regional basis, North America was the top contributor to monthly performance (+1.40%), of which Canadian renewables utility Brookfield Renewable Partners (+0.61%), U.S. renewables Clearway Energy (+0.29%) and NextEra Energy Partners (+0.24%) 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. Shares rose in anticipation of a Biden victory and were also supported by the recontracting of Brookfield hydro assets.

NextEra Energy Partners (NEP) is a growth-oriented contracted renewables company formed by its sponsor and general partner NextEra Energy (NEE) to own, operate and acquire contracted renewable energy generation assets located in North America. Growth in NEP comes from the dropdown of assets from NEE and we anticipate this should allow NEP to provide 12%–15% dividend growth to 2024.

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 of both NextEra Energy Partners and Clearway Energy also rose in anticipation of a Biden victory in the U.S. presidential election.

Turning to Asia Pacific, Australian electric utility AusNet Services also performed well, contributing +0.22% to monthly performance.

AusNet Services (AST) owns and operates energy infrastructure in Australia, including the electricity transmission network in Victoria, an electricity distribution network that delivers electricity to over 720,000 consumer connection points in Eastern Victoria and a gas distribution network that delivers natural gas to about 700,000 consumer connection points in Central and Western Victoria. AusNet’s share price increased during October following the release of the Victorian Electricity Distribution draft regulatory determination at the end of September, which provided increased certainty on future earnings.
Spanish electric utility Red Electrica was the largest detractor from monthly performance (-0.58%).

Red Electrica (REE) is engaged in the supply and transmission of electricity and is the sole high-voltage transmission agent and system operator in Spain. Shares fell in line with the Spanish stock market due to concerns over the second wave of COVID-19 in Spain and other European countries prompting new lockdowns, even though Red Electrica’s business is largely immune from power demand and price changes due to its regulated nature.

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 utilities (35%) 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 Global Income Strategy also uses yield quality as a secondary measure.

Monthly Stock Highlight

This month we review U.S. electric utility Edison International.

Edison International (EIX) is the parent company of Southern California Edison (SCE), one of the largest electric utilities in the U.S., and Edison Energy, a nonregulated energy services company. SCE serves more than 14 million people in California.

EIX is a solid regulated utility, operating in a favourable state regulatory environment.

We believe Edison International is poised for a turnaround following the various wildfire mitigation measures put in place in the recent years. In 2019, the California legislature passed AB1054, which limits wildfire liability downside risk by introducing a ‘liability cap’ tied to the rate base, while introducing a FERC-like prudency standard that provides more clarity for the regulator to determine cost recovery, as well as setting up wildfire and insurance funds for wildfire victims. Further, we note the risk has further been mitigated by the large budget the state has allocated to wildfire mitigation measures (including more firefighting vehicles and staff), as well as EIX’s own wildfire mitigation capex, which has been approved by the regulator.

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