Value Strategy August Commentary

Overview

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, transport stocks were the top contributors to monthly performance (+1.34%), benefiting from growing optimism related to a potential vaccine for the coronavirus, which would improve the outlook for mobility. U.S. rail company Union Pacific (+0.47%), Spanish airport operator Aena (+0.25%), French toll road operator Vinci (+0.21%) and Australian airport operator Sydney Airport (+0.21%) were the lead performers.

Union Pacific (UNP) is the largest listed railroad company in North America. UNP’s freight transportation services are crucial to the functioning of the U.S. economy. UNP reported strong quarterly results despite the impact of COVID-19, demonstrating strong cost controls amidst volume declines. UNP is currently outperforming volume estimates.

Aena is the monopoly owner of the Spanish airport system, operating the 46 airports under a dual-till regulatory regime. Aena also manages London Luton Airport, with a 51% stake.

Vinci operates half of France’s toll road network under long-term concession agreements, a growing portfolio of airport concessions and a global contracting business.

Both names were up on the improved outlook for mobility. Aena gains also followed a period of weaker performance caused by increasing virus cases and associated isolation requirements in Europe.

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.

Turning to North America, Canadian renewables utility Brookfield Renewable Partners (+0.21%) also contributed to monthly performance.

Brookfield Renewable Partners (BEP) is a pure-play renewables operator and developer headquartered out of Canada, focused on international hydro, solar, wind and storage technology. Investors reacted positively to the partnership’s effective stock split and the creation of C-corp shares.

U.S. electric utility American Electric Power (-0.29%) was the largest detractor from monthly performance.

American Electric Power is a U.S. regulated company with operations across 11 states. This geographic spread provides diversification and a footprint to take advantage of any state-specific developments and opportunities. During the month, utilities lagged as the broader market rallied, fuelled by optimism of a vaccine for the coronavirus, fiscal stimulus and ongoing easy monetary policy. Increasing concern around inflation also made for a less constructive environment for utility stocks.

All returns are in local currency.

Positioning and Outlook

On a regional level, the Strategy’s largest exposure is in the U.S. & Canada (52%) and consists of exposure to utilities (41%) and economically sensitive sectors (11%).

For the RARE Infrastructure Value Strategy, the primary quantitative tool in portfolio construction is the Excess Return, on which our stock ranking system is based.

Monthly Stock Highlight

This month we review U.S. energy infrastructure company Cheniere Energy.

Cheniere Energy is an energy infrastructure company that owns and operates U.S. liquefied natural gas (LNG) export facilities.

Cheniere’s business is predominately contracted with take-or-pay contracts (85%) with investment grade counterparties.

By 2022, Cheniere will have one of the largest LNG export platforms globally and is uniquely positioned to become a major global supplier of LNG to meet growing global demand.

We expect Cheniere to de-risk significantly as the company commissions the remaining two LNG export trains. This will lower the risk premium and cost of capital and allow the company to focus on deleveraging and returning capital to shareholders.

We also have a strong confidence in management’s ability to execute the capital expenditure program and optimise the cost structure of the business.

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