Commentary - June 2023Foresight Global Sustainable Infrastructure Fund

The Portfolio Managers discuss how the macroenvironment has affected companies that own and operate physical infrastructure. They also discuss where they are finding investment opportunities, projected earnings growth rates, and how investors should think about sustainability.

How has global monetary policy and persistent inflation affected the portfolio’s holdings?

Broadly speaking, year-to-date performance in many publicly traded companies that own and operate infrastructure assets has been driven by central banks’ actions to raise interest rates in an effort to combat inflation. Relative to other asset classes and other parts of the market, the Fund’s holdings tend to be more sensitive to interest rates given their long-dated earnings.

Over the last quarter, interest rate and inflation fears have eased in the U.S. In the U.K. the situation has been less positive as inflation has remained stubbornly high and therefore, the central bank has been more aggressive in measures to reduce inflation.

Looking ahead, until there is more clarity in inflation levels and where interest rates are headed, central banks’ rate decisions will likely continue to drive performance.

While the Fund’s holdings have been negatively affected by this uncertain environment, we believe the portfolio looks attractively valued as a result.

Where are you currently finding infrastructure opportunities?

We look for companies that own and operate physical infrastructure assets across developed countries. These include companies in Europe, the U.K., Australia, New Zealand, the U.S. and Canada. Currently, we see lower relative valuations in companies domiciled in the U.K. and Europe. Yet in certain instances, we are willing to pay more for a higher quality company outside that region.

As an example, the Fund holds U.S.-based American Tower (AMT), one of the largest publicly held global real estate investment trusts. AMT is an independent owner, operator, and developer of multi-tenant communications real estate with a presence in 25 countries. The Company leases space on its communications sites to wireless service providers, radio and television broadcast companies, wireless data providers, government agencies and municipalities. In addition, AMT manages rooftop and tower sites and holds other telecommunications infrastructure, fiber and property interests. AMT’s sustainability strategy is aligned with its vision to make communication possible everywhere whilst it has committed to or are signatories of several global organizations and initiatives.

What is your growth outlook for infrastructure companies over the remainder of 2023?

Many of the stocks in the portfolio are expected to have mid- to high-single digit percentage growth, depending on the sector and type of infrastructure. For example, we anticipate that digital infrastructure companies could experience 7-9% growth rates, which could be a prudent projection. For example, Equinix, a REIT that invests in interconnected data centers, is bullish about its growth prospects and guided future earnings growth around 7-9% to 2027. For renewable companies, earnings growth could be slightly lower, at an estimated 5-7% growth rate over the next five years.

How should investors think about a company’s performance potential compared to its adherence to sustainability?

We believe these two ideas should be inextricably linked for long-term investors. We are looking for businesses that will thrive in a decarbonizing and a decarbonized world. In addition, we believe companies that prioritize social impact mitigate some of the legal, regulatory and reputational risks associated with social and environmental issues.

In short, at Foresight Group, our philosophy is that the most successful companies over the medium- and long-term will be those that grow their business with sustainability in mind.