Insights

Portfolio Manager Eric Bright covers his case for infrastructure companies in a lower rate environment, opportunities in infrastructure companies, and the impact of artificial intelligence technology on data centers and energy demand.

What is the case for infrastructure companies in a lower interest rate environment?

In the higher inflation and higher interest rate environment that preceded the Federal Reserve’s first rate cut in September 2024, the share prices of infrastructure companies were put under significant pressure.

Many investors left the sector in favor of alternative investment opportunities, however the tailwinds behind companies that operate in selected infrastructure sectors continue to go from strength to strength, with attractive investment opportunities represented across the portfolio.

As we move forward, rates are expected to decline although they will likely remain moderately higher than the historic lows we experienced during the pandemic era. We believe this declining and lower rate environment is positive for infrastructure stocks for several reasons:

• Many investors avoided the sector as rates rose, and as result, we have seen deep discounts to our interpretation of fair value in many infrastructure companies. In fact, valuations among all areas of infrastructure have traded below their 3-year averages for most of 2024.
• A lower cost of debt should increase the opportunity to deploy capital into new, earnings-accretive investments and increase companies’ return on invested capital.

We believe the Cromwell Foresight Global Sustainable Infrastructure Fund offers investors an excellent opportunity to invest in sustainable infrastructure companies with high-quality, defensive earnings.

What opportunities do you see in infrastructure companies?

At Foresight Group, we seek a balanced exposure across the infrastructure sector in areas that offer the strongest thematic tailwinds—renewable energy, digital infrastructure and core and social infrastructure. We combine this with an approach that involves sustainability.

Given this focus, we see four preeminent investment opportunities in infrastructure:

1. Changing energy systems as the world moves towards cleaner energy and decarbonization.
2. Developing physical infrastructure to support an evolving digital world.
3. Narrowing the funding gap in infrastructure. Taxpayers are demanding better infrastructure, and governments are looking to partner with companies for this development and delivery of these critical assets.
4. Creating enhanced healthcare systems to care for an aging population.

These four areas have captured the attention of institutional investors and significant capital has been allocated to address these challenges.

Would you please discuss the artificial intelligence (AI) trend and its impact on data centers and energy demand?

The growth of AI has significantly increased the demand for data centers, and placed a greater emphasis on their own sources of power. While current data centers can sufficiently operate, the build out of new data center faces headwinds due to factors such as land scarcity and limited
power availability. We believe digital infrastructure companies with projects under development, such as Fund holdings Digital Realty and Equinix, essentially have an important and strategic head start.

We expect new wind and solar facilities will step in to supply this much needed power. This is a positive for the Fund’s renewable energy holdings, exemplified by Brookfield Renewable Partner’s agreement to provide Microsoft with clean energy to power their data center operations.

Finally, there is an opportunity for electrical utility companies as well. Grid owners must get support from regulators to invest capital in their wires and pylon that transport this much needed energy and, consequently, earn a set return. We expect regulators to support grid utilities, creating an environment that allows for attractive investment returns.