Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
The Battleground: AMP Capital Vs Magellan on Infrastructure
In this piece, we compare two funds in the wholesale infrastructure space: the AMP Capital Core Infrastructure Fund and Magellan’s Infrastructure Fund, both pioneers in the space with a great track record. Infrastructure funds provide investors opportunity to invest in vital assets, such as bridges, airports, toll roads, ports, electricity, gas and water utilities, energy pipelines, communications, and rail facilities. The attractiveness of these types of funds is their predictable returns and low volatility. Infrastructure projects often carry long-term underlying cash flows that are often inflation-protected, however, there are many ways to think about them.
The Approach
AMP Capital: The approach AMP has taken is to invest in ‘hard’ (or unlisted) infrastructure assets as well as listed equities. Unlisted infrastructure is usually difficult for retail investors to access directly due to the large capital outlay required. The fund removes these barriers to entry through “an integrated approach to building a strategically blended portfolio of unlisted infrastructure assets and listed infrastructure securities in Australia and around the globe, offering investors a total return of income and capital growth.” It also combines the unlisted component with a portion of listed infrastructure shares, allowing it to offer regular redemption opportunities.
Magellan: Magellan has taken a slightly different approach to that of AMP by constructing its portfolio with a selection of 20 to 40 infrastructure stocks that seeks to deliver stable returns. The Magellan infrastructure fund aims to provide investors with access to a global portfolio of listed infrastructure securities, diversified across a wide range of countries and infrastructure sectors, with the benefit of being able to change allocations quickly, unlike unlisted asset strategies.
Holdings
Hard assets are often attractive to investors looking for predictable returns, as infrastructure projects are typically characterised by low levels of competition and high barriers to entry.
AMP Capital – The portfolio includes both Australian and global infrastructure assets. These assets include Melbourne Airport, Angel Trains (UK) and Powerco (NZ), which are among the largest and most significant infrastructure assets in their sectors and respective countries. The portfolio provides a strong total return and has a lower correlation to both equities and traditional bonds.
| Asset | % of fund | Sector |
| APAC (Melbourne Airport) | 11.18% | Airports |
| American Tower Corp | 6.89% | Communications Infrastructure |
| Luton Airport | 4.69% | Airports |
| Crown Castle Int Corp | 4.20% | Communications Infrastructure |
| ANU Student Accommodation | 4.11% | Student Accommodation |
| Angel Trains | 4.01% | Rail |
| Enbridge Inc | 3.70% | Transmission & Distribution |
| Auckland South Corrections Facility | 3.20% | Social |
| Macarthur Windfarm | 2.88% | Renewables |
| ITS ConGlobal | 2.73% | Logistics |
Magellan: Magellan believes that a structured portfolio of 20 to 40 equity investments provides sufficient diversification to make sure the portfolio is never overly correlated to any single company, industry-specific or macro-economic risk. Here are the companies that Magellan invests in:
| Company | Sector |
| American Water Works Co Inc | Water Utilities |
| Atmos Energy Corp | Gas Utilities |
| Crown Castle International | Communications |
| Enbridge Inc | Energy Infrastructure |
| Eversource Energy | Integrated Power |
| Red Electrica Corporacion | Transmission and Distribution |
| Sempra Energy | Gas Utilities |
| Transurban Group | Toll Roads |
| Vopak NV | Energy Infrastructure |
| Xcel Energy Inc | Integrated Power |
The Sectors
Infrastructure investments usually focus on ‘hard’ infrastructure. These can be broken down into three categories:
- Transportation – Airports, railroads, roads, and ports
- Commodity – Gas pipelines, electricity grid and interstate pipeline system
- Data – Communication towers and data centres
AMP Capital – The target allocation is 50% unlisted infrastructure and a combination of 50% listed infrastructure securities and cash. As at 30 June 2020, the fund’s asset allocation was: Global listed infrastructure – 49.1%, Unlisted infrastructure assets – 43.2%, Cash – 7.8%. The largest exposure is to airports with communications and electricity distribution not far behind. Here is the breakup for sectors the portfolio is invested in:
| Sector | % |
| Airports | 20% |
| Communications Infrastructure | 17% |
| Diversified Utilities | 1% |
| Healthcare | 1% |
| Logistics | 3% |
| Ports | 0% |
| Rail | 6% |
| Social | 5% |
| Student Accommodation | 5% |
| Transmission & Distribution | 20% |
| Water | 5% |
| Renewables | 3% |
| Integrated Regulated | 8% |
| Toll Roads | 6% |
Magellan- The fund released this commentary at its recent June 30 update:
“Airports are the infrastructure sector most challenged by the COVID-19 crisis. Airports provide essential services and we are confident that the demand for their services will return over time. However, the duration of the lockout and any following economic downturn will be key to how these companies recover. Much uncertainty remains around the near-term outlook for the aviation sector and we remain cautious about the investment prospects for airports compared with other infrastructure sectors. As a consequence, we have reduced the allocation to airports.”
With this in mind, as at the end of June 2020, the investment portfolio comprised about 45% regulated utilities, 45% infrastructure and just 6% in airports.
Here is the sector split:
| Sector | % |
| Airports | 6% |
| Communications | 5% |
| Toll Roads | 15% |
| Rail | 5% |
| Energy Infrastructure | 11% |
| Gas Utilities | 14% |
| Transmission & Distribution | 13% |
| Integrated Power | 14% |
| Water Utilities | 6% |
| Cash | 11% |
The Performance
AMP Capital Core Infrastructure Fund-performance (% p.a)
| Performance to 30 June 2020 | 3 mths (%) | 1 yr (%) | 2yrs (%) |
3yrs (%) |
5yrs (%) |
Since inception % |
| Cum distribution, after fees (Class A) | 2.64% | -3.97% | 3.35% | 4.57% | 7.47% | 7.72% |
| Benchmark | 1.02% | 4.30% | 4.89% | 5.25% | 5.46% | 6.80% |
| Magellan Infrastructure Fund | 2.64% | -15.53% | -8.97% | 4.40% | 6.99% | 7.58% |
| Benchmark* | 3.32% | -21.98% | -14.72% | -1.65% | 2.23% | 4.26% |
As you can see, both have outperformed their benchmark over the longer term, but likely have not offered as much protection from market volatility as expected, given the overwhelming impact of COVID on the movement of people.
Recent updates
At Magellan’s recent webinar hosted by Gerald Stack, head of investments & infrastructure, he exhibited the slide below, showing Magellan’s top ten holdings and how they were affected by COVID:
| Company | Type of Utility | Impact of COVID-19 on 2020 results | ||
| 1 | Atmos Energy | US gas distribution | Confirmed earnings guidance | Tick |
| 2 | Eversource Energy | US electricity and gas | Confirmed earnings guidance | Tick |
| 3 | Sempra | US electricity and gas | Confirmed earnings guidance | Tick |
| 4 | Xcel Energy | US electricity and gas | Confirmed earnings guidance | Tick |
| 5 | SNAM | Italian gas transmission | Confirmed earnings guidance | Tick |
| 6 | American Water | US Water | 1% reduction in earnings guidance | Tick |
| 7 | WEC Energy | US electricity and gas | Confirmed earnings guidance | Tick |
| 8 | Terna | Italian gas transmission | Confirmed earnings guidance | Tick |
| 9 | Spark Infrastructure | Australian Electricity | Hasn’t responded yet | Tick |
| 10 | National Grid | UK and US electricity and gas | FY20 EBIT reduced by approx 4% will be recovered in future years | Tick |
Summary
Post-COVID, the world will still function as it did prior. Infrastructure will be required to support continued population and economic growth. However, government budgets are stretched thin and the private sector may be required to fill the gap. That should present many opportunities for investors; and both AMP and Magellan have a wide range of global infrastructure assets to capture any upside potential.
