First Sentier Global Listed Infrastructure Fund: February 2023 update

• The managers mainly invest in companies that own or run infrastructure assets
• They target high quality companies that they believe are mispriced or undervalued by the market
• Performance has been stronger recently, aided by the managers picking stocks better able to cope with higher levels of inflation
• This fund does not currently feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

First Sentier Global Listed Infrastructure aims to deliver income and capital growth over time, by investing in companies from around the world that run or own infrastructure assets. The managers have the flexibility to invest in infrastructure companies of any size, but favour larger, more established ones.

The fund could add some diversification to an income-focused portfolio but also work well alongside global funds. However, investing in specialist areas adds risk, so we think it should usually only form a small part of a well-diversified investment portfolio.

Manager

Lead manager Peter Meany was an analyst at Macquarie Group, involved in the development of the private infrastructure market. He later moved to Credit Suisse Equities (Australia) and became Director and Head of Infrastructure and Utilities Research. He joined First Sentier in January 2007 and established the First Sentier Global Listed Infrastructure fund.

Andrew Greenup co-founded the First Sentier Global Listed Infrastructure fund and works closely with Meany. His main areas of research are the toll roads and utilities sectors. Prior to joining First Sentier in 2005, Greenup was a senior equities analyst at Allianz Global Investors.

Edmund Leung has recently been made a portfolio manager. He’s been at First Sentier for 16 years and worked his way up through the team. Leung’s sector specialisms are towers and utilities, mainly in the UK and Asia.

The managers have built a strong team of analysts with varying backgrounds to call on for support, ideas and challenge. They prefer to work with a smaller team that they can develop and mould over time, while ensuring each area they invest in has sufficient coverage.

William Thackray and Sophie Smith, who joined the team over two years ago, have started to take responsibility of sectors from Meany and Greenup. This has freed up some of the managers time but we are comfortable they remain focused on this fund.

Process

The managers invest in high quality companies they think are mispriced. Though they don’t want to invest simply because they’re cheap. They invest in companies which tend to hold unique positions in their market, offer services that are important to the end customer, have a strong financial position and a tried and tested management team.

As part of their process, they’ll evaluate a company’s liquidity, complexity and governance whilst assessing its value and quality against their 25-point ranking system. This means they’ll typically avoid investing in lower quality businesses, but also direct investments in infrastructure assets.

Instead, they focus on infrastructure related companies which are listed on the stock market. This is because shares are typically easier to buy and sell (more liquid) than physical assets. They tend to invest in relatively few companies, meaning each one can contribute significantly to returns. Though it's a higher-risk approach.

Over half of the fund is invested in the US, with the rest spread across Europe, including the UK, and some higher risk emerging markets. The managers believe in investing over the long term, so turnover of companies is kept relatively low. That said, they’ve taken advantage of recent market volatility by adding to sectors they feel are set to do well, but also added to some existing investments at lower prices and sold some companies where conviction was lower.

The managers increased the fund’s investment in the railroad and tower sectors. Railroad traffic volumes are likely to be resilient despite weakening economic conditions and companies in this sector can often pass on inflation. Companies in the tower sector are holding up well despite rising rates, so the managers feel the long-term potential remains robust.

AENA is a company in the airport sector the managers feel has promise, though the sector is still experiencing issues. The market is concerned about the cost-of-living crisis in the UK, which is a key market for tourism in Spain. The likelihood of less business and reduced tourist traffic is causing concern. Though the managers feel tourism is bouncing back quicker than many expected, due to the pent-up demand following the pandemic. AENA have also recently announced that January foot traffic is higher than it was pre pandemic. As a result, the team’s conviction increased, and they decided to buy some more of the company, at a more attractive price.

Despite a positive year overall, the managers feel they made a mistake with their investment in China Gas. Specifically, that they were too slow when it came to selling the company. The state of China’s economy was worse than many expected and while the team were weighing up their decision, the company had to deal with a pipeline explosion. They decided to sell and recycle the cash into ENN, another gas utility in China. They have more confidence in this company’s prospects and want to capture the growth opportunity from the re-opening of China’s economy.

Culture

First State Investments was acquired by Mitsubishi UFJ Trust and Banking Corporation in August 2019 and was rebranded First Sentier Investors. The fund was renamed First Sentier Global Listed Infrastructure, but the managers have retained the same investment approach.

The managers have helped to develop a strong culture since the fund was established and believe their team is here for the long run. Meany feels strongly that First Sentier is a great place to build a career alongside experienced, level-headed investors. Analysts are encouraged to get involved in other areas to help build their knowledge and add more value to the fund. They're also incentivised in a way we feel aligns their interests with those of investors.

Overall, we like the culture and philosophy that's been cultivated at First Sentier Investors. Their philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and engage with companies to make sure they're run in a way that'll benefit all shareholders.

ESG integration

First Sentier Investors group place responsible investing at the heart of what they do. They believe identifying companies that are driving sustainable outcomes, and whose management have the highest governance standards, is key for long-term returns.

Every investment team across First Sentier, including FSSA Investment Managers and Stewart Investors, has full autonomy to develop their own approach to environmental, social and governance (ESG) analysis and integration.

ESG has been integrated into the Global Listed Infrastructure fund's investment process since it launched. There is a dedicated responsible investment team the managers can draw upon for additional support and challenge, and the managers encourage the companies they invest with to report carbon targets and become more sustainable over time.

Cost

The standard annual ongoing charge for this fund is 0.80%, but we’ve negotiated a saving of 0.06%, so it’s available on the HL platform for an annual charge of 0.74%. The HL platform fee of up to 0.45% per annum also applies.

Performance

The fund launched in October 2007 and for the first eight years, its performance was measured against the S&P Global Infrastructure index (the only available index at the time). Since launch the fund has significantly outperformed this index, returning 274.45%*.

But in March 2015, Meany, along with a few other industry professionals, created a new index which they believed was more credible, structured and helpful to investors – the FTSE Global Core Infrastructure 50/50.

Since then, the fund has underperformed this index, largely driven by the managers investment style being out of favour but also because the index limits exposure to utilities to 50%. Over this period, utilities have done well so not being able to own as much of them has detracted from relative performance. Though, having a cap on the number of utility infrastructure companies has helped keep the fund well diversified, giving investors access to other types of infrastructure.

Over the last 12 months, the fund has delivered a return of 12.23% compared to the 10.52% return of the FTSE Global Core Infrastructure 50/50 index. It’s also ahead of the average returns in the IA Infrastructure sector. Though investors should remember that this is over a short time frame, and past performance isn’t a guide to the future.

In 2022, companies in the energy mid-stream sector, the storage, transportation and marketing of petroleum, held up well. Cheniere Energy, Sempra Energy and DT Midstream were among the funds top performers and benefited from the growth in US liquefied natural gas exports. Crown Castle, a cell tower operator, and Aurizon Holdings, an Australian freight operator also did well.

It hasn’t all been plain sailing though. China Gas was the fund’s worst performer driven by China’s weaker economic backdrop and pipeline explosion.

The fund’s performance was also hampered by the stronger performance in utility companies. The fund has less invested in utilities, due to the benchmark constraint, which means it missed out on the associated gains. Having less invested in utility companies like Southern Company, Enbridge Inc and Consolidated Edison Inc, held back performance.

Past performance isn't a guide to the future. Source: *Lipper IM to 31/01/2023

Find out more about First Sentier Global Listed Infrastructure including charges

First Sentier Global Listed Infrastructure Key Investor Information