Commentary - March 2024Foresight Global Sustainable Infrastructure Fund

In the following commentary, the Fund’s Portfolio Managers discuss the drivers of 1Q24 performance, factors contributing to an increase in earnings growth, and the case for investing in infrastructure.

Would you please discuss what drove performance in the infrastructure sector in the first quarter of 2024?

Negative sentiment continued to weigh on the sector in the first quarter, primarily due to the narrative around higher-for-longer interest rates. Interestingly, in a Bank of America survey of fund managers in March, the sectors that managers were most underweight to were real estateand utilities. This weighting highlights the continuing caution of investors towards real assets.

In our opinion, prices have significantly diverged from fundamentals as companies continued to generate healthy cash flows. As a result, we believe investors can gain access to undervalued infrastructure businesses with defensive earnings growth. As we gravitate to a more stable and benign rate environment, we expect to see a strong rebound in prices to levels that Foresight has been observing in the private markets.

Given the low valuations yet healthy cash flows, how are companies reacting?

We believe many of these infrastructure companies represent attractive takeover candidates. For example, in March 2024, a Fund holding, European renewable energy business Encavis, received a $3 billion takeover offer from the U.S. private equity firm KKR. Encavis offered a significant growth pipeline in terms of development and construction opportunities in addition to a substantial portfolio of operational assets. The bid was made at a 50% premium to the share price at the time of the offer, highlighting the deep value on offer in listed markets.

Given the smaller market capitalization of some of the Fund’s holdings, merger and acquisition (M&A) activity could continue if valuations remain depressed.

Fund Holdings - Many Could be M&A Candidates
  Fund Allocation Average Market Cap (in Millions)
Digital Infrastructure 23.7% $41,373
Healthcare 9.8% $6,765
Diversified Infrastructure 27.8% $5,753
Renewables 38.7% $3,646

What factors contribute to an increase in earnings for infrastructure companies?

Within the three broad areas the Fund invests in—renewable energy, diversified infrastructure, and digital infrastructure—different factors contribute to a growth in earnings.

For Renewable Energy companies, growth in earnings typically comes from two sources. One is the performance of their in-place assets such as the revenue from their power generation which often includes an inflation linkage. The other is from the construction and development of new projects that can add accretive earnings growth. Hence, initiatives such as the Inflation Reduction Act are important because it makes building projects easier and more profitable.

While earnings growth is lower in Diversifed Infrastructure, these companies should also benefit from a high degree of inflation linkage, with assets such as toll roads performing well. These companies are trading at extremely low valuations and offer attractive, relatively high dividends.

In Digital Infrastructure, huge demand for data center space, both for existing space and for data centers that are in development, is driving an attractive level of earnings growth. For communications infrastructure, such as cell towers, earnings growth is largely contractual and thus highly reliable.

What is your case for investing in infrastructure companies?

We believe the Fund offers the following:

  1. Attractive entry point given the current low valuations. Listed infrastructure trading multiples are attractive and are significantly below their historic multiples as shown below.
Low Valuations Offer Attractive Buying Opportunity
  Current EV/EBITDA 5-Year Average EV/EBITDA Discount to 5-Year Avg.
Digital Infrastructure 13.7x 21.2x 35%
Healthcare 13.5x 19.1x 29%
Diversified Infrastructure 16.3x 19.8x 18%
Renewables 13.5x 16.1x 16%

Source: Bloomberg as of 4/24/24. Data excludes U.K.-listed companies where data is not available.

  1. Diversification in an overall portfolio. Over the past year ended 3/31/24, the correlation between the Fund and the FTSE All World Index was 0.53; the correlation between the Fund and the S&P 500 was 0.51.
  2. Opportunity to capitalize on long-term secular trendsas the world transitions to a clean economy, utilizes digital infrastructure at a faster pace, and relies on the private sector to build critical infrastructure projects.

Enterprise value (EV) is used to determine the value of a company. Enterprise value divided by earnings before interest, taxes, depreciation, and amortization (EBITDA) is a valuation multiple used to determine the fair market value of a company. Cash flow is the amount of cash that flows in and out of a business in a specific period. Correlation measures the extent to which two or more variables move in relation to each other.

The FTSE All-World Index represents the performance of the large and mid cap stocks from the FTSE Global Equity Index Series and covers developed and emerging markets.