The investment team recently met with the managers of the Franklin Clearbridge Infrastructure Income fund to discuss the recent performance of the fund and the long-term opportunities within the infrastructure asset class.

The holding is a key component to our portfolios and has been held for a long period of time.

We have been extremely impressed with the resources available to the fund, the managers long-term specialism, and the detailed and repeatable process for managing the fund and its underlying holdings.

Basics of the fund

The fund is a listed infrastructure fund that invests on a global basis. The team is experienced and have been working together for over 15 years. The fund will only invest in listed infrastructure assets and focuses on regulated utilities and companies whose physical assets move people, goods and services throughout an economy (user pay assets). These assets are lower risk and have positive income, growth, and inflation protection characteristics.

The fund has historically provided a good income yield of 4% or above. There has also been positive capital growth from the underlying holdings, providing a very healthy total return for investors. The fund has seen positive inflows due to the increasing focus from investors on infrastructure and the positive performance of the fund over the past few years.

Recent performance and allocation of the fund

The fund’s recent performance has been excellent and has provided investors with positive returns above the fund’s benchmark. Even with inflation rising, the team are confident that they can continue to outperform their benchmark of OECD G7 inflation plus 5.5% over a rolling 5-year period.

The team have been managing allocations within the fund to reflect the changing economic conditions. Moving through 2020 and into 2021, as economies started to reopen, allocations within the fund were increased to user pay assets including toll roads, airports & ports. All these assets were hit hard due to lockdowns implemented due to COVID, so the opportunity for growth was increased due to the low valuation levels. There was also increased investment in upstream pipeline businesses that had been impacted from the falling commodity prices and lower demand. These areas provided increasing income as well as good growth moving through 2021.

As we moved through 2021 and into 2022, economic conditions started to become less positive, and so the team rotated away from user pay assets into more regulated utility holdings. Some user pay assets are still held in the portfolio but the overall weighting has decreased.

The increase in regulated utilities is due to positive valuation metrics of the assets, the stable cash flows and steady demand within the assets held. These assets are also heavily involved in the need to decarbonise the world over the coming years. Utilities are at the forefront of this and are focussing on this opportunity which will be present for decades to come.

What about the future for the fund?

The team believe inflation will provide a headwind to growth for the short term and so are still looking to be more defensive within their holdings. With the near term being very volatile and risks higher, they believe having a more defensive stance will help to reduce volatility whilst also providing a positive return with inflation protection for investors.

They do however believe that over time there will be the opportunity to increase investment in user pay assets as demand picks up and countries c move back to a pre pandemic way of life. When this occurs, there should be rotation into these types of assets that will provide the greatest exposure to increasing growth.

In general, the team believe that the opportunity for infrastructure has never been as positive, due to the increasing expenditure that is required within the infrastructure space. With fiscal constraints in place, private businesses will have to take up a large proportion of this and so the underlying holdings invested into will be direct beneficiaries.

The increased focus on climate change, the implementation of 5G and the on-going demographic and societal changes regarding urbanisation should all drive infrastructure spending higher.

In conclusion

The team at MAIA are extremely happy with the Franklin Clearbridge Infrastructure Income fund. Even with the recent performance of the fund, we believe the fund is well positioned to continue to provide positive income and capital growth over the medium to long term, with inflation protection built in. Having a lower correlated alternative asset that can provide these characteristics is key for our portfolios to outperform our benchmarks through differing market conditions.

With the fund continuing to be active in its management of allocation to holdings; the team being as experienced as they are; correlation to other asset classes being low; the fund displaying positive upside and downside capture; valuations for the fund being at average to lower levels; and dividend growth potential embedded into the fund, we are happy to continue to hold the fund.

The team here at MAIA have also been able to gain access to a cheaper share class of the fund due to our size of investment and being a long-term holder of the fund. This will be a benefit to investors where we can access this fund, as it will reduce the underlying costs of owing the fund.