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

Value 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 (+6.43%), of which Canadian renewables utility Brookfield Renewables Partners (+1.47%), U.S. energy infrastructure company Cheniere (+1.01%) and U.S. electric utility Edison International (+0.87%) 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.

Cheniere Energy is an energy infrastructure company that owns and operates U.S. liquefied natural gas (LNG) export facilities. The vaccine announcements have helped improve the outlook for a recovery from COVID-19, which in turn improved the outlook for LNG. Cheniere is seeing continued strong demand in exports to emerging markets.

Edison International 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. Shares were up on little incremental news.

In Western Europe, French rail operator Getlink (+0.79%) and Danish renewables utility Orsted (+1.31%) also performed well.

Getlink is a French rail company that owns the concession over the Channel Tunnel rail link between the U.K. and France. The latest COVID-19 vaccine developments improve the prospects for the gradual reopening of economies and travel. Getlink should see gradual traffic recovery as the vaccine gets rolled out.

Danish renewables utility Orsted is the global industry leader in the offshore wind industry, with about 30% market share. Over the past few years, Orsted has gradually exited its fossil fuel activities and more recently its energy distribution and retail business, transforming itself into a green solutions provider. It is a pure play in renewables with over 90% of its earnings from regulated and contracted activities in 2019–25. A green recovery in the EU with a hydrogen strategy to combat climate change should be long-term drivers for Orsted. Shares performed well, mainly driven by strengthened commitments to reduce carbon emission by the European Commission, the U.K. raising its national offshore wind target and newly elected U.S. president Biden’s pro-renewables position. The U.S. Congress also passed a stimulus package in December that included tax credits for renewables projects.

U.S. communications company American Tower (-0.23%) was the largest detractor from quarterly performance.

American Tower owns, operates and develops wireless communication towers, leasing tower space to wireless phone operators. It owns around 52,000 towers, of which 22,000 are located in the U.S. During the quarter, the company underperformed as concerns arose around the amount of churn resulting from the merger of T-Mobile with Sprint. The towers sector also underperformed as vaccine potential caused investors to switch into growth opportunities rather than continuing to hold the relative stability and safety of the tower business.

All returns are in local currency.

Positioning and Outlook

On a regional level, the Strategy’s largest exposure is in the U.S. & Canada (51%) and consists of exposure to regulated and contracted utilities (34%) and economically sensitive user pays infrastructure (17%).

For the Global Infrastructure Value Strategy, the primary quantitative tool in portfolio construction is excess return, on which our stock-ranking system is based. As such, driven by valuation, the Investment Committee initiated positions in U.S. rail operator CSX, Spanish electric utility Iberdrola, U.S. electric utility Southern Company, Canadian energy infrastructure company Enbridge and Spanish communications company Cellnex.

The fund also used the opportunity to crystallise some gains by exiting U.S. water utility Essential Utilities, Spanish electric utility Red Electrica, U.S. electric utility American Electric Power and Canadian electric utility Emera.

Quarterly Stock Highlight

This quarter we review French airport operator Aeroports de Paris (ADP).

ADP owns and operates three airports in Paris, including Charles de Gaulle (CDG), Orly and Le Bourget, and owns minority stakes in several global airports groups, including TAV in Turkey and Schiphol in Holland.

ADP's core Paris airports are high-quality infrastructure assets that provide essential transportation services to Paris. These airports have a very attractive hinterland, with Paris as the world’s most popular tourist destination and the economic centre of France.

Regulated aeronautical tariffs are linked to the level of investment and inflation. Regulation is dual-till, providing stable, regulated pricing, as well as upside in non-aeronautical activities such as airport terminal retail and development of their extensive land bank surrounding the airports.

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