What’s the fund?
This month we decided to provide an update on Magellan’s Infrastructure Fund, which was added to the Thematic Bucket several years ago to gain an exposure to falling interest rates and the high quality cash flows associated with monopolistic infrastructure assets.
Magellan was formed in Australia in 2006, by Hamish Douglass and has grown to manage over $76bn in assets for institutional and retail investors around the world. The Magellan team have been focusing on infrastructure investing since 2007 when this fund was launched, which has allowed them to build a competitive advantage through networks, deal flow, proprietary data and in-house modelling. The fund has grown from $0 to $1.7bn in 2019 through strong performances (16.6% p.a. over 10 years) and the guidance of the Portfolio Manager Gerald Stack. Magellan differentiates its approach to most competitors in the sector by limiting the investment universe to those infrastructure assets that are essential to the efficient functioning of a community and not sensitive to competition. They understand that investors are seeking the CPI + 5.0% returns that come from monopoly-like assets, not the volatility that comes with cyclical businesses. Therefore they avoid companies subject to political and sovereign risk, whose income is impacted by commodity prices or which require excessive population and usage growth to justify their valuations.
Where does it fit in your portfolio?
The assets owned by Magellan are unique and can never be replicated or disrupted with one such example being a network of 40,000 telecommunication towers that are now relied upon to deliver data by all businesses and consumers in their daily lives. This means they will become increasingly important as the global population grows and put the owners in the position to benefit from increased spending and demand. The infrastructure sector benefitted from falling bond rates around the world, which inflated valuations, with many investors now concerned about the prospect of increasing rates. The weaker economic outlook for 2019 and 2020 has shown that bond rates may not increase as quickly as expected, increasing the value of the regulated income streams of true infrastructure assets. Very few asset classes offer a true inflation hedge, with infrastructure, particularly listed, one of the only investments that has delivered in the past through its combination of consistent demand and regulated income. Importantly, it is those assets that provide this type of hedge that Magellan focus on identifying.
It is important to own assets and companies that are difficult to replicate, and which provide the most secure income streams possible to investors. Investing in infrastructure assets, including evolving electricity grids, cleaner energy sources, telecommunications and other utilities offer investors an opportunity to be part of the foundations on which the future global economy will be built. Whilst interest rates will remain important for valuations they are far less important for listed infrastructure assets than unlisted ones like those owned by industry super funds. This is because listed infrastructure assets are revalued daily by the market, whilst unlisted assets can be valued as rarely as every 1 to 3 years providing the illusion of security. This affords the ability to both profit from mis-pricings that regularly occur as well as achieve more diversification than the substantial size of unlisted assets allows. The underlying exposures can also be changed quickly should one particular asset or sector become more or less attractive. We believe the consistent and regulated income streams of true infrastructure assets, have an increasingly important role for Australian investors.
What does it invest in?
The Global Infrastructure Fund invests only into world-class listed infrastructure companies, with a preference for those who deliver reliable and predictable earnings, from consistent demand. This means they avoid businesses relying on such inputs as energy prices, population growth etc. to generate higher returns. Most of Magellan’s underlying investments have utilised historically low interest rates to extend their debt facilities (as far as 10 years) at incredibly low levels, reducing the risk of increasing bond rates, whilst the key focus of management has been to purchase only regulated assets that have the ability to demand higher compensation should inflation increase and focus on those that are integral to daily life.
At present, the fund is well diversified with 37% invested in the US, 21% in Asia and 26% in Europe. The largest allocations are to Airports (19%) and Toll Roads (14%) considered the kings of infrastructure assets, with Gas Utilities (13%), Integrated Power (16%) and Energy Infrastructure (10%) the next largest. Each asset is an industry and regional leader including Aena Airports in Spain, which manages 46 airports in Spain and 17 globally including London Luton, Aeroports De Paris, Crown Castle in the US, which owns 40,000 mobile phone towers including 5G, and Transurban the monopolistic toll road provider in Australia. Other key holdings include:
How has it performed?
The fund has performed strongly since inception, adding 9.1% per annum, compared to the Infrastructure Index which delivered 6.2%. More recently, it has returned 14.5% over the last 10 years and 22.1% over the last 12 months, both above benchmark. This has been driven by a number of factors, including falling bond rates, but most importantly the recovering global economy since the end of the GFC and the lack of appropriate infrastructure spending around the world.
What income does it provide?
The Magellan Fund is no different to other managed funds, in that it only distributes income when it makes a profit, whether this is source from income, capital gains or a combination of both. That being said, the consistent income produces by the underlying assets means the fund has been a strong source of income since inception including:
- 2019 – 3.80 cents (3.01%)
- 2018 – 5.36 cents (4.35%)
- 2017 – 11.27 cents (9.09%
- 2016 -9.29 cents (8.21%)
It’s important to note that as with all managed funds, investors should expect the unit price to remain flat over time, or slowing increasing with performance, and to fall around December and June when distributions of cash are made, not unlike when a company becomes ex-dividend.