M&G (Lux) Global Listed Infrastructure Fund: Real rotation and regime reversion

Diversification is back in fashion

The heady cocktail of lower consumer price inflation and a resurgent Republican party in the US have catalysed a rocket-fuelled reversion in equity markets.

While the 6% decline in the semiconductor index on 17 July only took it back to where it was a few days prior, the velocity of the correction and the corresponding price action in other areas of the market have reignited the regime change debate. Small caps have enjoyed their best weekly performance relative to the S&500 since 1988. Even if this proves short-lived, investors are reminded of the enduring need to manage risk and diversify.

Since last October, the reflexive equity trade has been to buy cheap passive index products -- which is fine when things go up. Of course, the reverse is true when markets correct. As the saying goes, whilst it tends to be an escalator ride up, the market usually takes the lift on the way down.

The case for regime change is strong, in our view. Narrow leadership in relatively expensive US tech stocks looks increasingly unstable in a world of potentially higher protectionism, deglobalisation, inflation volatility and fiscal largesse. 

Investing in the right ‘monopolies’

After a challenging 18 months we believe that fortunes could potentially be about to change for the M&G (Lux) Global Listed Infrastructure Fund. This strategy offers diversification, duration, and dividends. The fund is underweight the tech ‘monopolies’ – indeed it does not hold any of the so-called ‘Magnificent Seven’ (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla) -- which are now consensus longs. On the other hand, it is overweight physical asset-backed ‘monopolies’, which in our view are much less vulnerable to innovation shifts and disruption.

Thousands of column inches are being dedicated to the Apple Intelligence AI platform, and whether or not its development will drive an iPhone upgrade cycle. Meanwhile, the fund’s less media-profiled airport operators, toll road concession owners and electricity grid managers are reporting record traffic volumes and services demand. Under the radar, our holdings are growing their earnings and dividends.

The essential nature of infrastructure is, arguably, being mispriced by financial markets despite geopolitical and macroeconomic tectonic shifts which will place an ever greater stress on physical and digital networks that have been starved of capital for years.

The M&G (Lux) Global Listed Infrastructure Fund has a distinct product design, which differentiates it from peers. The portfolio consists of a blend of traditional economic infrastructure (transport, utilities, energy) with social and civic facilities (universities, schools, hospitals) and evolving infrastructure accessing digital networks in data communication, financial payments and data centres. 

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

Investing for uncertain times

The Royalty businesses – a frequently misunderstood and overlooked asset class, which feels fitting for the economic circumstances of today – sit within the fund’s ‘evolving’ category. These companies own the right to payment streams from the mineral assets they control on their land. The businesses are asset-backed, but also asset-light, as they carry no operating costs or risks from the extraction activity.

Greater energy security, the decarbonisation drive and efforts to rebuild domestic manufacturing will likely make commodity exposure critical for portfolios. Prairiesky Royalty and Franco Nevada are the two royalty businesses in the M&G (Lux) Global Listed Infrastructure Fund that offer a diverse mix of hard asset exposures, from oil & gas to diamonds, and from copper to gold.

The recent record high in the gold price is a sign of inflation concerns, geopolitical instability and macroeconomic volatility. The M&G (Lux) Global Listed Infrastructure Fund tends to perform well in uncertain times, in our view, due to the stability of the business models within the portfolio and also its ability to grow the underlying dividend distribution to shareholders to seek to offset inflationary erosion.

Today, the fund offers a dividend yield in excess of 4%, which has a historical growth of 5-10% per year and, we argue, has the potential to benefit from the underlying asset prices re-rating if bond yields decline.

Performance in H1 2024

Past performance is not a guide to future performance

Monthly, YTD, YTQ performance (%)

Calendar-year performance (pa %)

¹ Benchmark  = MSCI ACWI Net Return Index.

The benchmark is a comparator against which the fund’s performance can be measured. It is a net return index which includes dividends after the deduction of withholding taxes. The index has been chosen as the fund’s benchmark as it best reflects the scope of the fund’s investment policy. The benchmark is used solely to measure the fund’s performance and does not constrain the fund's portfolio construction.

The fund is actively managed. The investment manager has complete freedom in choosing which investments to buy, hold and sell in the fund. The fund’s holdings may deviate significantly from the benchmark’s constituents. The benchmark is not an ESG benchmark and is not consistent with the ESG Criteria and Sustainability Criteria.

Source: Morningstar, Inc., as at 30 June 2024, EUR Class A Acc and USD Class A Acc shares, net returns, income reinvested, price-to-price basis. Performance data do not take account of the commissions and costs that may incur on the issue and redemption of units. Benchmark returns stated in share class currency.

Fund description

The fund aims to deliver a combination of capital growth and income that is higher than that of the global equities market over any five-year period while applying the fund’s environmental, social and governance (ESG) criteria and sustainability criteria and to increase the income stream every year, in US dollar terms. It looks to do this by investing at least 80% of the fund in shares issued by infrastructure companies, investment trusts and real estate investment trusts of any size, from any country, including emerging markets. The fund usually holds shares in fewer than 50 companies. Infrastructure companies include businesses in the following sectors: utilities, energy, transport, health, education, security, communications, and transactions. The fund invests in securities that meet the ESG criteria, applying an exclusionary approach and SDG-aligned investing as described in the prospectus. The fund’s recommended holding period is five years.

Other important information:

• Please note that the fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.
• Investing in this fund means acquiring units or shares in a fund, and not in a given underlying asset such as a building or shares of a company, as these are only the underlying assets owned by the fund.
• For explanation of technical terms, please refer to the glossary via the link https://docs.mandg.com/docs/glossary-master-en.pdf

Further risk factors that apply to the fund can be found in the fund's Prospectus.

For European investors, the fund’s sustainability-related disclosures can be found on the website below:  https://www.mandg.com/investments/professional-investor/en-lu/funds/mg-lux-global-listed-infrastructure-fund/lu1665237704#sustainability