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

Value Strategy October Commentary


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 (+1.60%), of which Canadian renewables utility Brookfield Renewable Partners (+0.46%) and U.S. electric utility Edison International (+0.34%) 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 recontracting of Brookfield hydro assets.

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. During the month, Edison benefited as investors sought safe haven areas of the market amidst rising coronavirus worries.

In Western Europe, Danish renewables company Orsted also performed well, contributing +0.54% to monthly performance.

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. Shares rose on the back of the European Commission’s strengthened commitment to reduce carbon emissions, the energy policy of U.S. presidential candidate Joe Biden, the EU’s green hydrogen ambition and the U.K. lifting its national offshore wind capacity target. These have enhanced investor sentiment about the long-term growth outlook of the global offshore wind industry and Orsted as the market leader.

U.S. rail operator Union Pacific (-0.51%) was the largest detractor from monthly performance, following a softer than anticipated 3Q earnings result, as well as the announcement that PSR-veteran Jim Vena (UNP’s COO) would be leaving the company at the end of the year, after which he would migrate to an advisory role for 6 months before leaving the firm. Vena was considered one of the best rail operators in the industry.

All returns are in local currency.

Positioning and Outlook

On a regional level, the Strategy’s largest exposure is in the U.S. & Canada (55%) and consists of exposure to utilities (41%) and economically sensitive sectors (14%).

For the RARE 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 Spanish electric utility Iberdrola, U.S. rail operator CSX and Spanish communications company Cellnex.

The portfolio exited its remaining position in Spanish electric utility Red Electrica to fund the aforementioned new positions.

Monthly Stock Highlight

This month we review U.S. electric utility Public Services Enterprise Group.

Public Services Energy Group (PEG) operates the largest utility business (~85% of earnings) in New Jersey, along with a generation business (~15% of earnings) comprising nuclear and gas turbine facilities. Recently, PEG announced the strategic review of its gas assets, including a potential divestment process, which, if successful, would materially improve its ESG profile. Adding to its ESG profile is the company’s intention to pursue offshore wind in Mid-Atlantic and New Jersey regions (targeting 7500 MWs of buildout and initially partnering with Orsted on the 1100 MW Ocean Wind project).

PEG’s revenues are regulated by the state utility commissions where it operates (such as the New Jersey Board of Public Utilities) and its electric transmission assets are regulated by the Federal Energy Regulatory Commission (FERC).

We believe with PEG we are owning a premium utility business and receiving a stable generation business (declining contribution to earnings). With a high-quality, long-tenured management team, PEG has delivered a 11% regulated asset base CAGR since 2009, with the utility business consistently ranking in the top quartile in several performance measures.


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