The strategy has now been running for 77 months. November provided some breathing space to markets after a very challenging October. The strategy rebounded, up 1.7% for the month, in-line with US stocks, but well ahead of the Eurostoxx 50 which was down 0.8% for the month. The S&P Global Infrastructure Index, the Infrastructure ETF’s and the major competitors all performed similarly to the strategy, gaining around 1.5%. Investment grade bonds were up 0.5%, and interest rate sensitive stocks gained, with the iShares International REIT ETF up 3.2% and the Dow Jones Total Market Utilities Index up 3.3%. Year to date, the strategy is down -2.6%, whilst the average of the 7 largest competitors is -6.7%, the S&P Infrastructure index is -10%, the Stoxx50 is -9.4%, the S&P 500 is up 2.7% and the MSCI World LC is -2.3%.
The strategy is 97% exposed to quoted infrastructure stocks with a 3% cash provision. Our largest exposures are to toll roads (21%), railroads (20%), communications infrastructure (16%), diversified infrastructure companies (11%), airports (11%), and renewable energy (7%). The best performing sector was water and waste, up 3.5%, and diversified infrastructure, up 3.3%, and the worst was services (one stock) down 11.7%.
Although fully invested, the nature of the portfolio remains defensive: we have no emerging market equities and a low exposure to the UK, we have 32 high quality stocks with a bias towards “growth infrastructure”, and we have tried to reduce as far as possible exposure to higher interest rates. Most of our stocks are limited to their domestic markets, which is the nature of much infrastructure, and therefore exposure to the Trade Wars so far has been minimal (we have no ports). All stock positions can be liquidated in one day. In accordance with our hedging policy, all major currency exposure is hedged. At month end, 92% of the portfolio was hedged. We focus on ensuring that there is broad diversification among the infrastructure sub-sectors. We avoid concentrated positions and our largest stock position is 4.1%. Since March, 2017, when we reallocated the portfolio 100% towards infrastructure equities, it has a beta of 0.5 and a correlation of 0.5 compared to the MSCI World Index.
The portfolio’s underlying positions trade at a weighted 2018e dividend yield of 2.4% gross, a 2018e PE ratio of 21x and a price to 31.12.18e net asset value of 3.1x (compared to 2.6%, 16x and 2.2x, respectively for the MSCI World).
Sectors and individual positions
Tollroads were down 0.9% for the month. We continue to see this sector as having attractive opportunities, with an average equity IRR of 10.6%. In an environment of decelerating economic growth, we see revenue and EBITDA growth through 2022 of 5.2% and 6.2%, respectively. The sector stands out for its ability to pass on inflation. Vinci was down 3%. We continue to look for concessions revenue growth of 3.6% YOY and contracting growth of 6.4% YOY. Autoroutes traffic should increase 2.6% YOY and airports should be up 4.3% YOY. The construction order book is up 6% YOY. French contracting continues to be buoyant, and the valuation is attractive at a 2019e PE ratio of 12.4x and a free cash flow yield of 7.4%.
Railroads lost 2% this month. The 4-week moving average for the rail group accelerated to +2.1% YOY growth, from +1.9%. Shipments of construction materials decreased -9.9% YOY, industrial products rose +7.1%, petroleum and petroleum products rose +23.7%, intermodal shipments increased +5.5%, coal traffic increased +0.3%, automotive shipments were down -0.3% and agriculture traffic decreased -2.9%. Average velocity is running slower YOY for all rails except CSX and Canadian Pacific. Dwell times (the time a train spends at a scheduled stop without moving) were longer YOY for Kansas City Southern and shorter (good news) for the other railroads in the portfolio. The North American railroads continue to perform well, but they have been punished by the stock market as investors anticipate a slowdown in overall economic activity.
Aena dropped 5.8% after losing 5.5% in October. It delivered a 4% increase in retail spending in 3Q, and we expect it to experience the highest level of retail segment growth of any European airport operator. On the other hand, passenger traffic growth is likely to decrease in 2019 from this years’ 6%. The company has a strong balance sheet and a free cash flow yield of 7.2% forecast for 2019, and we think it is a stock to retain in the current risk-off environment. Fraport lost 7%, after dropping 10.2% in October. Its 3Q earnings were above consensus, including retail where average spend per passenger declined 7.3%, an improvement on the 12.3% decline in the first half of 2018. We think that the market is far too negative on this stock, which should trade 50% higher based on our DCF valuation.
Algonquin Power was up 4.8% after publishing 3Q results in-line with expectations. It has some major organic growth and M&A initiatives not yet reflected in its price, and it aims to achieve 9-13% average annual EPS growth through 2023, making it one of the strongest growth stocks in the portfolio. Renewable energy had a mixed month with a flat performance. EDP Renovaveis was down 5.5% after reporting 3Q results. 9-month EBITDA is down 12% YOY, whilst net income was down 30% YOY. This resulted from lower prices in Poland, Romania and North America and negative exchange rate effects, partially offset by new wind capacity additions. The company was awarded a new wind concession in Poland in November with a 15-year price guarantee.
The best of our sectors during the recent market turbulence has clearly been the diversified infrastructure companies, which suffered the least in October and was the top gainer this month, up 3.3%. Brookfield Infrastructure Partners gained 4.7%, 3i Infrastructure gained 3.6% and John Laing gained 1.9%.