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.
Why MBA’s infrastructure affiliate questions gas
Maple-Brown Abbott’s affiliated listed infrastructure management firm is turning off gas and switching more to electric as the world adjusts to a low-carbon energy future.
In a paper published last month (January 25), the Sydney-based Global Listed Infrastructure says its analysis suggests electric utilities will be the major beneficiaries of global climate change energy policies while gas faces several challenges.
“We have put our research into practice with respect to the investment opportunities we currently see globally. As of December 2020, approximately 29 per cent of our portfolio is exposed to electric utilities, versus approximately 1 per cent in gas utilities,” the paper says. “This compares to 22 per cent and 4 per cent exposure to electric and gas utilities in the same period two years ago (December 2018).”
Titled ‘The Impacts of the Energy Transition on Infrastructure Needs in the US’, the listed infrastructure manager’s study says while the electrification trend appears entrenched across many countries and sectors, the “outlook for gas utilities remains a lot less certain, and much more dependent on unique factors and/or unproven technologies”.
But, regulated electric utilities – including generation and distribution networks – offer a more attractive way to access growth in low-carbon energy compared to commercial renewable operators.
The paper says commercial renewable companies are currently over-valued compared to regulated utilities with a “stark divergence between the stock performance” of the two energy sub-sectors.
Furthermore, the commercial renewable sector presents some risks for investors such as opaque ownership structures, the relatively small size of companies and the dominance of developers (rather than long-term owners) in the solar market.
“For all these reasons, at this point in time, we see more compelling opportunities to participate in the renewable investment opportunity through regulated electric utilities, and not through commercial renewable companies,” the paper says.
“… In our opinion, electricity transmission and distribution network owners are favourably positioned to benefit from the transition to a low carbon economy. We find the regulated returns that they receive on these investments to be stable and predictable and provide an attractive risk-adjusted return.”
The study – authored by Andrew Maple-Brown, the co-founder and managing director of MBA’s affiliated company, Global Listed Infrastructure, and three associates covers a number of trends and technical developments in the energy industry including hydrogen, battery technology and storage innovations.
“As global energy needs continue to evolve, we believe it is critical for infrastructure investors to continue monitoring these trends, as they will have a significant impact on the growth outlook for these businesses,” the report says.
The three co-authors of the paper are: Georgia Hall, Kevin Liu and Amelia Campbell. The company, which is owned by the four founders – Andrew Maple-Brown, Justin Lannen, Steven Kempler and Lachlan Pike, plus MBA, was formed in 2012. It represents the third leg of MBA’s strategy mix, the others being the traditional Australian equities business and an Asia ex-Japan strategy.
Global Listed Infrastructure is represented in New Zealand by third-party marketing firm Heathcote Investment Partners. In 2019, MBA secured its first major institutional mandate in NZ after winning a NZ$250 million (A$234 million) allocation (now likely more than doubled) from ANZ Investments.
– David Chaplin, Investment News NZ
