Please find below our Investment Market Update as at 5th February 2021.
This week, Blue Sky brings you a briefer than normal market update and then, as promised, we focus on one of the themes we like for this year and beyond.
Blue Sky Investment Market Update
It’s a bit calmer this week!
As we expected, the equity markets have recovered much of their lost ground from the previous week. The social media sites didn’t stop though, forcing the price of Silver up at the start of the week. Brokerages, however, have increased their margins in response to a whole heard of ‘on-liners’ buying up stock.
One of the big problems for the markets, was that hedge funds that had shorted stocks were being badly hit by the activity of retail investors and were therefore forced to unwind other positions. In other words, selling equity holdings amongst other assets to protect their businesses, which in turn spooked the broader investment market.
Just reflecting on the main indices, in the last five days the FTSE 100 has risen by 1.05% and the S&P 500 (US) by 3.31%, and Ice Brent Crude Oil by 8.8%.
Investing is a dangerous game if you don’t know what you are doing
This is especially so for new investors. As reported in Bloomberg today, those late to the GameStop craze saw the value of their investments fall by more than 80% this week. Yesterday alone, the shares fell by 42%, erasing $30bn in market value.
Investing in Infrastructure
What is infrastructure?
For many, infrastructure means large physical assets like airports, roads, power stations and water treatment plants etc. It can also include hospitals, schools and university campuses. However, the spectrum has widened with a mandate for renewable energy generation, energy management and storage, digital communications and waste management.
How does investing in Infrastructure work?
Infrastructure companies invest into long-term contracts of up to 25 years and their aim is to provide consistent revenues which pay dividends to investors. The contracts are invariably linked to inflation which means they are protected against the cost of living, making them even more attractive for investors.
Typically, the infrastructure projects are backed by governments which delivers a strong element of security.
Two speed approach
Alex Araujo, the manager of the M&G Global listed Infrastructure fund, states that evolving infrastructure can often provide stronger structural growth than the more traditional infrastructure assets. This is because it is used by fast growing parts of the global economy -including communications, e-commerce and technology.
UK vs Global
The investment performance in the UK has been attractive in terms of growth and dividends. Foresight, one of our investment partners, has delivered really good returns in this space. Their UK Infrastructure Income fund which we have used across our portfolios, was launched in December 2017 and since inception has delivered a total return of 30.1% and yield of over 5%.
In 2020, which was undoubtedly a challenging year, the fund outperformed the FTSE All-Share index by 8.8%.
The investment objectives of this fund are as follows:
- To manage the fund actively and take advantage of opportunities in the renewable energy and infrastructure sectors.
- To provide an annual income targeting 5% to be paid through quarterly dividends with the possibility of capital growth.
It’s fair to say that the growth achieved to date is unlikely to be repeated as there are now less inefficiencies to be had which have undoubtedly benefitted the fund since inception. However, with many listed companies in the All-Share space, not paying a dividend or paying a much-reduced dividend, a 5% yield with the prospect for some capital growth certainly seems attractive in this climate.
In Blue Sky terms, we hold their UK fund within our Sapphire portfolio range where there is a mix of UK and Global Infrastructure.
Again, the investment performance has been very desirable and in its short history has easily outperformed its UK counterpart. On the global stage, there are a greater range of opportunities and indeed inefficiencies across developed, developing and underdeveloped countries.
Since inception in July 2019, the fund has delivered a total return of 46.76 % (up to 31st December 2020) thus outperforming UK equities by some distance, by 37.2% on the FTSE All-Share. What is more, it has achieved its returns with a lower volatility than the equity indices.
The investment objectives for this fund are as follows:
- To provide growth of more than 3% per annum above the rate of UK inflation (CPI) over any five-year period and provide investors with quarterly dividends.
- To invest only in companies that they believe deliver a net social or environmental benefit and meet the principles of the United Nations Global impact criteria.
Just a word of warning however: Infrastructure, like any investment, isn’t plain sailing as the ‘pandemic shock’ in March 2020 demonstrated. The demand for energy fell off a cliff as the global economy shutdown.
Whilst none of this communication should be seen as a recommendation for you personally, it’s worth noting that the global fund is regarded as embracing the higher risk strategy.
By this, I mean where are the assets within the funds broadly allocated?
As you can see, in the UK, 40% is orientated towards renewable energy with an 83% bias towards the UK.
Globally, the renewable energy exposure is 41% with the largest regional exposure being in the Unites States and Canada.
A brief overview from Foresight on the latest dynamics in this space.
I caught up with the investment managers at Foresight just two weeks ago and, in bullet form, this is what they broadly said:
- Governments around the world are intent on stimulating their economies by a commitment to infrastructure. Such stimuli not only positions the economy for the future, but it brings confidence, creates jobs and increases tax revenues.
- The US election outcome is very supportive of infrastructure and stronger Environmental and Social Governance.
- The pandemic means we all need to reflect on what has happened and this will undoubtedly create new opportunities.
- Digital infrastructure is gathering pace. The construction of purpose-built data centres which are sustainable is growing rapidly.
- Foresight as a company, because of their experience and research capability, have been able to pick up assets which are now getting noticed by the wider market. Early mover advantage has helped their performance, particularly globally.
- Environmental accountability is playing an increasing part in decision making. Only today Foresight informed us that they have disinvested from their first company due to them not meeting Foresight’s ESG requirements.
- In the renewable energy space, it is wind power which is presenting the best opportunities. Something the British Isles should excel at!
- It is interesting to note that companies who wish to borrow can often raise debt more cheaply when demonstrating sustainable characteristics. In the investment space, it is very evident that investment houses and trustees of pensions schemes are becoming part of the solution by excluding companies who don’t meet their criteria. In turn, such companies need to get their act together… money talks!
- Foresight believe we are in the foothills of the mountain, infrastructure wise, when one considers the amount of capital likely to be deployed over the next 3-5 years.
We really like that the investment opportunities above are backed by physical assets. Across our in-house portfolios, we have used UK Commercial Property to provide predictable income streams with the prospects for capital growth. In 2019, we removed Commercial Property as a standalone asset from all our portfolios for obvious reasons and chose UK infrastructure instead.
Over the last year we have lowered our UK exposure and increased our global emphasis although the holdings vary according to each risk rated portfolio. For our specific Infrastructure portfolios, we have now recommended a focus on global infrastructure only, although any risk is largely offset by the other holdings across our range of portfolios.
The world has been shaken to its core. Sadly, in many areas, governments and companies have been found wanting. We are entering a new paradigm whereby the focus will not be on austerity but re-investment to invigorate economies but also to get them fit for purpose for the modern world.
Hopefully this was useful. Here’s to brighter mornings and evenings, and brighter times ahead!
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.