Why utilities are more than a bond proxy: ClearBridge
Global listed infrastructure can expect to see strong returns in the next 12 months, underpinned by structural tailwinds including decarbonisation and localisation.
Shane Hurst, managing director and senior portfolio manager at ClearBridge Investments, recently sat down on the Relative Return podcast to discuss the infrastructure and utilities’ performance.
The $810 million ClearBridge RARE Infrastructure Value Fund (Unhedged) is this year’s winner of the Infrastructure Fund of the Year at the Money Management Fund Manager of the Year Awards.
“Expectations over the next 12 months are for outperformance after what has been, especially for utilities, a pretty challenging six to nine months as you’ve seen bond yields move up substantially around the world,” Hurst said.
“There’s no doubt there are multi-decade tailwinds which will lead to very strong outcomes for the space.”
“I am very excited about the next 12 months in both our income and value strategies. We expect both to provide very strong outcomes going forward,” he shared.
Utilities have been hurt by the Russian invasion of Ukraine in 2022, but this has allowed ClearBridge to pick up some assets at cheaper valuations.
Hurst explained: “What tends to happen in a market is you see real yields move up over the last nine to 12 months in the short term, then utilities underperform. It really is mark-to-market; it doesn’t reflect the fundamentals because utilities are able to pass through inflation and higher bond yields. But the sticker shock impact is underperformance of utilities which creates opportunities.
“We found really good value in utilities that had suffered in Europe as a result of what happened between Russia and the Ukraine, leading to higher energy prices.
“We’ve been reducing that now as it is pretty fairly priced.”
He said many people mistakenly believe traditional utilities aren’t focusing on decarbonisation.
“Traditional utilities are the firms which are leading to decarbonised outcomes which most people don’t realise. People think about a lower carbon outcome or a lower greener outcome and immediately associate that with electric vehicles and solar or battery manufacturers.
“They are at the forefront of decarbonisation, and that means a huge amount of asset-based growth going forward is unprecedented, 5–7 per cent asset based growth. These are not bond proxies at all because its underlying growth profile is far higher than what you’d get from a bond.”
The ClearBridge RARE Infrastructure Value Fund (Unhedged) has returned 2.6 per cent over the last 12 months to 31 August 2023 versus returns of 10.3 per cent by the OECD G7 Inflation Index, an underperformance of -7.6 per cent.
However, it has seen returns of 9.7 per cent since its inception in 2011 compared to returns of 7.9 per cent by its benchmark, an outperformance of 1.7 per cent.
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Jasmine Siljic
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