The underperformance of the Magellan Infrastructure fund was significantly driven by the portfolio’s lack of investment in oil-related firms.
The fund manager released its quarterly infrastructure update for January 2023, which outlined the challenges of the last quarter and opportunities for the year ahead.
Portfolio manager Gerald Stack, who also took up the role of deputy chief investment officer last year, commented that the firm tended to avoid investment into firms where “movements in the commodity prices, particularly oil and gas, lead to fluctuations in revenue and earnings over time”.
When admitting why the $808 million fund strayed away from oil and other externally-influenced commodities at a time of rising commodity prices, he said: “We don’t have a degree of confidence around the valuation of these assets”.
Brent crude oil prices rose from approximately US$40 per barrel in December 2020, to US$80 per barrel in December 2022, which Stack said was a “major detractor” from the fund’s performance.
Alongside rising interest rates, these two factors had led to the fund performing poorly and underperforming its benchmark, Stack said.
As at 31 December, 2022, the fund had lost 5.9% over one year versus positive returns of 1.3% by the S&P Global Infrastructure Net Total Return Index.
Despite the results, the manager remained confident that oil and more volatile commodities would have “little to no effect” on the fund in the long-term.
When looking ahead this year, Stack highlighted the continued re-opening of the global economy as the first major opportunity. Some 24% of the fund was invested specifically in toll roads, including four of its top 10 largest holdings.
“We expect to see traffic growth and the outlook for toll road companies remains quite positive,” he said, describing these firms as an “attractive space” to invest in.
Moreover, the re-opening of the aviation industry after the COVID-19 pandemic and increasing numbers of airline passengers would have “strong impacts on revenue and earnings”. Stack expected to see greater flows into airports with recovery on the horizon alongside rising business travel and had 8% invested in airports.
The quarterly update identified the transition towards a net-zero emission world as the second key opportunity moving forward, with Stack expecting this to be a “multi-decade theme”.
“As this capital investment works its way through the system, we would expect their earnings to grow in a very reliable, predictable manner,” the CIO commented in consideration of renewable energy and increased electrification.
With electric utilities accounting for 36% of the infrastructure fund, Stack noted that “the portfolio is well positioned to account for those opportunities”.
