Commentary - December 2023Foresight Global Sustainable Infrastructure Fund

In the commentary below, the Portfolio Managers discuss the tailwinds for infrastructure assets, Foresight Group’s strengths in global infrastructure, and how the Fund is currently positioned.

In what types of infrastructure assets does the Fund invest?

The Fund invests in real infrastructure companies that own critical physical assets across three broad areas: renewable energy, core and social infrastructure, and digital infrastructure.

  • ~40% in Renewable Energy. We seek a lower risk exposure, focusing on companies that own and operate assets and avoiding manufacturers and those that primarily engage in development or construction. We believe renewable companies are poised to benefit from tailwinds such as the Inflation Reduction Act, which incentivizes investments in domestic energy production while promoting clean energy.
  • ~40% in Core and Social infrastructure. Assets in this area include health care facilities, schools, bridges, and toll roads. These assets receive payment for their availability rather than usage levels, which makes them attractive in a recessionary environment.
  • ~20% in Digital Infrastructure. As the “physical plumbing” in a digital world, digital infrastructure includes data centers, towers, and fiber networks. These assets support the growth of cloud computing, artificial intelligence (AI), and 5G.

Broadly in terms of opportunities in 2024, the entire infrastructure sector appears attractively valued, with particular stand outs in renewable energy and digital infrastructure given their significant tailwinds over the coming decade.

What are the current tailwinds for infrastructure assets?

Companies that own and operate infrastructure assets are poised to benefit from long-term trends that are spurring demand. For one, from an environmental standpoint, the world is transitioning towards cleaner energy. In addition, many countries in Europe are de-risking their energy supply chain from a dependency on Russia. And finally, many corporations are seeking to meet their environment and social sustainability targets.

With respect to digital infrastructure, the growth of cloud computing, the rollout of 5G, and the recent explosion of AI appears to be in the early stages of development. Over time, we believe this rising demand can create attractive earnings profiles for digital infrastructure companies who can facilitate the rollout of these advancements.

What is your outlook for infrastructure assets as we head into 2024?

The sector has suffered from negative sentiment in 2023, driven by fears linked to higher interest rates. In 2024, a more stable and benign environment should be positive for companies that own and operate physical infrastructure assets, both from a fundamental perspective and improving valuations. Importantly, many infrastructure companies do not need ultra-low interest rates to successfully operate.

Currently these companies offer defensive earnings growth at an attractive price. Within renewable energy, companies are currently trading at high single-digit or low double-digit earnings multiples and selling assets to institutional investors in private markets for mid- to high-teens multiples.

As it relates to the Cromwell Foresight Global Sustainable Infrastructure Fund, we do not try to predict macroeconomic movements but rather focused on owning high-quality infrastructure companies globally with earnings growth and experienced management teams who can deliver on their strategy.