The following seeks to explain how we view the covid-19 crisis. While the situation is fluid, we can see that the lockdown of communities is hurting many companies including some we invest in.
Our investment universe comprises regulated utilities (water, gas and electricity) and infrastructure companies (toll roads, airports, communications infrastructure, energy infrastructure and social infrastructure). Overall, the health emergency has affected infrastructure businesses harder than utilities.
Regulated utilities might face some short-term declines in earnings but we do not expect significant changes to their long-term earnings outlooks. Their earnings are highly defensive and regulators generally allow for losses due to issues outside of the control of the regulated utility to be recovered over the near to medium term. We do not expect significant impacts upon water utilities, integrated power utilities, gas utilities and transmission and distribution utilities, which comprise more than 60% of the Core portfolio, even though, notwithstanding their defensive characteristics, they have suffered share price declines in recent weeks.
Within our infrastructure universe, the airports and toll roads segments face significant short-term declines in patronage. Airports and toll roads provide essential services and the demand for the services will return over time. However, the duration of the lockout and any following economic downturn will be key to how these companies recover. We have allowed for a significant drop in passenger movements and car trips in our forecasts and assess that our companies have sufficient cash flow and liquidity to manage through the economic downturn. While we expect that some of these companies will reduce their dividends in the short term, our experience of previous demand shocks in the transport industry gives us confidence that the demand for transport will recover over the longer term, which will lead to resilient earnings and dividends.
While the pace of development of the infrastructure networks of telecommunications infrastructure companies might slow, we expect the earnings of these companies to be highly defensive in response to this crisis. The demand for data across mobile telephony and the internet will grow and continued investment in telecommunications infrastructure is necessary to satisfy this demand.
The energy infrastructure companies in the portfolio generate earnings by storing oil, gas and chemicals or transporting oil and gas across their pipeline networks. These companies have limited exposure to changes in the oil price and, while the revenues they earn from transporting oil and gas can potentially change with movements in volumes, underwritten ‘take or pay volumes’ usually account for the majority of revenues so we assess their exposure to volume decreases as low. If the customers of these businesses have solvency issues then this could cause problems, but access to energy infrastructure services is essential to their ability to earn revenues (i.e. it’s non-discretionary spend to the extent they remain operating). Importantly, we note that the overwhelming bulk of customers these companies serve are investment-grade credit quality. We thus believe the energy infrastructure companies are well placed to cope with the economic consequences of the virus.
The portfolio’s social infrastructure companies operate infrastructure assets such as schools and hospitals. They receive payments from governments or from semi-government authorities and face minimal, if any, demand risk. They typically have relatively high gearing levels compared with average companies, which reflects limited demand risk and the low credit risk associated with being paid by governments. These companies generate modest earnings for shareholders, reflecting the relatively low level of underlying risk. We expect these companies to operate in their normal manner. We will review their solvency profiles but we do not expect them to suffer undue risk.
We are confident that the underlying businesses that we have included in our defined universe and in our investment strategy will prove resilient over the longer term. We regard the businesses that we invest in to be of high quality and, while short-term movements in share prices reflect issues of the day, we expect that share prices in the longer term will reflect the underlying cash flows leading to investment returns consistent with our expectations.
Please keep safe and best wishes,
Head of Infrastructure
Important Information: This material is being furnished to you to provide summary information regarding Magellan Asset Management Limited 'doing business as'/'trading as' MFG Asset Management ('MFG Asset Management') and an investment fund or investment strategy managed by MFG Asset Management ('Strategy'), and has been prepared for general informational purposes only. No distribution of this material will be made in any jurisdiction where such distribution is not authorised or is unlawful. This material does not constitute, and may not be used for the purpose of, an offer or solicitation in any jurisdiction or in any circumstances in which such an offer or solicitation is unlawful or not authorized or in which the person making such offer or solicitation is not qualified to do so. This material is not intended to constitute advertising or advice of any kind and you should not construe the contents of this material as legal, tax, investment or other advice. The investment program of the Strategy presented herein is speculative and may involve a high degree of risk. The Strategy is not intended as a complete investment program and is suitable only for sophisticated investors who can bear the risk of loss. The Strategy may lack diversification, which can increase the risk of loss to investors. The Strategy's performance may be volatile. In making an investment decision, you must rely on your own examination of any offering documents relating to the Strategy. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of MFG Asset Management. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed such statements. Additionally, this material may contain “forward-looking statements”. Actual events or results or the actual performance of the Strategy may differ materially from those reflected or contemplated in such forward-looking statements. No representation or warranty, express or implied, is made with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this material. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. MFG Asset Management will not be responsible or liable for any losses, whether direct, indirect or consequential, including loss of profits, damages, costs, claims or expenses, relating to or arising from your use or reliance upon any part of the information contained in this material including trading losses, loss of opportunity or incidental or punitive damages. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any licence or right to use any trademark displayed without the written permission of the owner.
Important Information: This material has been produced by Magellan Asset Management Limited trading as MFG Asset Management (‘MFG Asset Management’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision.
This material may include data, research and other information from third party sources. MFG Asset Management makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of MFG Asset Management. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.
Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of MFG Asset Management.