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The Battleground: AMP Capital Vs Magellan on Infrastructure

In this piece we compare two funds in the wholesale infrastructure space: AMP Capital Core Infrastructure Fund and Magellan’s Infrastructure Fund, both pioneers in the space with a great track record.
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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:

    1. Transportation – Airports, railroads, roads, and ports
    2. Commodity – Gas pipelines, electricity grid and interstate pipeline system
    3. 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.




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