Infrastructure: beyond the HALO

As with any investment, your capital is at risk and any income isn't guaranteed. 

 

Infrastructure has done exactly what we need it to do this year. 

Returns have been strong, with some parts of the market delivering gains in the high teens. The asset class has held up far better than broader equities as the macro backdrop has become harder to read.

That matters particularly in the Monthly Income Fund. Going into this year, we had positioned the fund with an overweight to infrastructure relative to our strategic asset allocation.

Since the end of February, we have trimmed the allocation, taken some profits and rebuilt cash, leaving us better placed to respond as opportunities emerge. That flexibility becomes even more valuable when the market narrative shifts abruptly and low-probability events, such as war with Iran, suddenly force investors to rethink how much risk they are willing to carry.

The attraction of infrastructure, though, is not just that it has performed well recently. It is that the asset class combines structural growth drivers such as electrification, rising data centre demand, grid expansion and the energy transition, alongside attractive income, predictable cash flows and a degree of inflation linkage.

 

The ballast sheet

It also gives the Monthly Income Fund exposure to scarce, hard assets at a time when ownership of physical infrastructure is becoming more valuable.

Unlike many capital-light business models, infrastructure is less vulnerable to AI disruption and, in many cases, benefits from the heavy capital expenditure that AI is driving, whether through power demand and grid investment. This has been dubbed by some commentators as the ‘HALO’ effect – ‘hard asset, low obsolescence’.

The allocation gives us an unusual blend of defensiveness and structural growth. In portfolio terms, that is why infrastructure is not just the ‘flabby middle’ of the portfolio. Constructed well, an infrastructure allocation can combine three things at once: attractive income, opportunities for capital growth and portfolio diversification.

Part of the recent support has also come from infrastructure’s indirect exposure to energy markets. Following the escalation of the Iran conflict in late February, oil and gas prices rose sharply, and this has fed through into electricity prices, as gas often plays an important role in setting the market price of power. This has supported parts of the infrastructure market whose revenues are directly or indirectly linked to wholesale electricity prices.

That is visible, for example, in holdings such as Greencoat UK Wind, where the price it is receiving for some of its power generation is running ahead of the level that is assumed in its valuation.

North American utilities have been a major contributor to the Monthly Income Fund’s recent performance. The growth of large data centres is creating a new source of electricity demand, and utility companies are increasingly factoring this into their long-term investment plans.

We believe this can support earnings and dividend growth over the medium term. Southern, for example, has highlighted strong expected electricity sales growth driven in large part by data centres and other large users. At the same time, WEC has raised its demand and investment outlook following Microsoft’s expansion in Wisconsin.

Greater demand can also improve affordability for existing customers (households and smaller businesses), particularly if utilities can ensure that large new users (such as big technology companies) contribute meaningfully to the cost of the additional infrastructure required.

What matters from our perspective is that this has not simply been a passive allocation doing its job in the background. The value has come from being selective within the asset class and from treating infrastructure as an active source of return rather than a static diversifier.

Different parts of the market have been supported by different forces this year, whether power price-sensitive renewable generation (Greencoat Wind, Brookfield Renewable, Greencoat Renewables) or non-power price-sensitive regulated utilities (Exelon, Terna, Italgas).

That has allowed us to lean into those areas where the underlying fundamentals have been strongest. They are not the whole story within the infrastructure allocation, but they have been two of the more important drivers of performance.

It has also mattered at the portfolio level. Strong performance in infrastructure has not just been helpful in isolation; it has created room to make decisions elsewhere in the Monthly Income Fund from a position of strength.

That is one of the advantages of having several sources of return within the Monthly Income Fund. When one is working particularly well, it can give us more flexibility across the rest of the portfolio.

 

---