Ecofin Global Utilities and Infrastructure Trust : EGL Update by Marten & Co

Ecofin Global Utilities and Infrastructure Trust

Investment companies | Update | 22 November 2022

A portfolio for all seasons

Even considering the particularly challenging markets we have seen during the last couple of months, Ecofin Global Utilities and Infrastructure Trust (EGL) has posted a very respectable performance and has been issuing shares. This most likely reflects the long-term strong structural growth drivers, inflation linkages and the defensive nature of its investments, in an environment where the global economy is slowing down and tipping into recession. There is little doubt that current uncertainty has been unhelpful, but as COP27 illustrates, the challenges of moving to net zero haven't gone away and EGL's portfolio is positioned to support and benefit from this energy transition. Its portfolio has shown resilience, which we explore in this note, and unusually, its shares are trading at a discount. We think that this may be short-lived and could represent a buying opportunity.

Developed markets utilities and other economic

infrastructure exposure

EGL seeks to provide a high, secure dividend yield and to realise long‐term growth, while taking care to preserve shareholders' capital. It invests principally in the equity of utility and infrastructure companies which are listed on recognised stock exchanges in Europe, North America and other developed OECD countries. It targets a dividend yield of 4% per annum on its net assets, paid quarterly, and can use gearing anddistributable reserves to achieve this.

Year ended	Share	NAV total	MSCI	MSCI	MSCI UK
	price TR	return	World	World TR	TR
			Utilities
	(%)	(%)	TR. (%)	(%)	(%)
31/10/2018	2.1	(0.4)	1.5	5.7	(0.8)
31/10/2019	31.2	23.7	20.1	11.9	5.8
31/10/2020	8.9	3.1	(0.5)	5.0	(22.2)
31/10/2021	26.3	27.3	5.1	33.0	35.6
31/10/2022	5.9	6.9	11.1	(2.5)	4.3

Source: Morningstar, Marten & Co

Sector	Infrastructure
	securities
Ticker	EGL LN
Base currency	GBP
Price	202.00p
NAV	216.63p
Premium/(discount)	(6.8%)
Yield1	3.7%

Note: 1) Yield assumes that EGL at least maintains its

current quarterly dividend rate of 1.85p per share.

Share price and discount

Time period 31/10/2017 to 18/11/2022

250											10
225											5
200											0
175											-5
150											-10
125											-15
100											-20
2017	2018	2019	2020	2021	2022
					Price (LHS)			Discount (RHS)

Source: Morningstar, Marten & Co

Performance over five years

Time period 31/10/2017 to 31/10/2022

260
220
180
140
100
60
2017	2018	2019	2020	2021	2022
Price (TR)	NAV (TR)		MSCI World Utils. (TR)

Source: Morningstar, Marten & Co

This marketing communication has been prepared for Ecofin Global Utilities and Infrastructure Trust Plc by Marten & Co (which is authorised and regulated by the Financial Conduct Authority) and is non-independent research as defined under Article 36 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing the Markets in Financial Instruments Directive (MIFID). It is intended for use by investment professionals as defined in article 19 (5) of the Financial Services Act 2000 (Financial Promotion) Order 2005. Marten & Co is not authorised to give advice to retail clients and, if you are not a professional investor, or in any other way are prohibited or restricted from receiving this information you should disregard it. Charts and data are sourced from Morningstar unless otherwise stated. Please read the important information at the back of this document.

Contents

Market outlook and valuations update	3
Manager's view	4
We live in interesting times!	4
Asset allocation	10
Portfolio activity - YTD	11
Gearing - diluted by share issuance	14
Top 10 holdings	14
Performance	17
Strong long-term performance record	17
Year-to-date performance to 30 September 2022	18
Quarterly dividend payments targeting 4% of NAV per annum	19
Annual dividend rate raised to 7.4p per share	20
Earnings and income receipts continue to be resilient	20
Premium/(discount)	21
A discount has emerged, but this might be short-lived	21
Fund profile	22

Developed markets utilities and infrastructure exposure with an income

and capital preservation focus	22
No formal benchmark	22
Manager	22
Previous publications	23

Domicile	United Kingdom
Inception date	26 September 2016
Manager	Jean-Hugues de
	Lamaze
Market cap	227.3m
Shares outstanding	112.5m
(exc. treasury
shares)
Daily vol. (1-yr. avg.)	294.9k shares+
Net gearing	11.0%

Click for our most recent annual overview note

Click for an updated EGL factsheet

Click for EGL's peer group analysis

Analysts

Matthew Read

[e-mail]

James Carthew

[e-mail]

David Johnson

[e-mail]

Click to provide feedback to the company

Click if you are interested in meeting EGL's managers

Click for links to trading platforms

EGL's NAV total return from

since inception to 31 October

2022 was 11.2% per annum.

Ecofin Global Utilities and Infrastructure Trust

Market outlook and valuations update

As we explore in greater detail in the performance section on page 17, EGL has generated substantial outperformance of both the MSCI World Utilities Index and the S&P Global Infrastructure Index over the last six years. As we discuss in the manager's view section, 2022 YTD has been a very challenging year in financial markets globally and, reflecting their defensive characteristics and considerable inflation protection, these two listed infrastructure indices have markedly outperformed global equities as a whole (as represented by the MSCI World Index) and UK equities (as represented by the MSCI UK Index). In this environment, investors will welcome EGL's positive NAV return (6.9% for the 12 months to 31 October 2022), albeit that it has lagged the two US dollar-heavy comparator indices over this period. From inception to 31 October, EGL has provided an annualised NAV total return of 11.2% per annum, which is the same as that provided by the broader MSCI World Index (all figures in sterling terms).

Figures 1 and 2 offer a useful illustration as to why investors may wish to consider having an allocation to EGL's sectors: utilities (power, water and environmental services) and other economic infrastructure (transportation services), particularly with the current market backdrop of rising interest rates, inflation and risk of recession.

As illustrated in Figure 2, as financial markets collapsed in 2020, global utilities' earnings were resilient, and their valuation multiples remained stable relative to history. The same could not be said for global equities more broadly, which rebounded very strongly in response to the considerable stimulus injected by governments and central banks (the F12m P/E ratio for the MSCI World rocketed). Whilst a recovery in earnings saw these companies partly grow back into their valuations, global equities continued to look expensive relative to their pre- pandemic levels, until rising inflation and the prospect of rising interest rates took the steam out of global equity markets (particularly growth stocks, which have suffered as investors rotated back into value).

Figure 1: Performance of key indices -			Figure 2: MSCI World and MSCI World Utilities
					rebased to 100 - over five years							F12m P/E ratios over five years
180												26
160												24
											22
140
											20
120
											18
100
											16
80
											14
60												12
	Nov/17	Nov/18	Nov/19	Nov/20	Nov/21	Nov/22	Nov/17	Nov/18	Nov/19	Nov/20	Nov/21	Nov/22
				MSCI World		MSCI World Utilities		S&P Global Infrastructure					MSCI World			MSCI World Utilities
Source: Bloomberg, Marten & Co						Source: Bloomberg, Marten & Co
Update | 22 November 2022															3

Aided by good stock

selection, EGL's portfolio has

been resilient.

Update | 22 November 2022

Ecofin Global Utilities and Infrastructure Trust

The invasion of Ukraine drove up the prices of various commodities and energy, which had already been rising as the global economy recovered from the effects of COVID. This exacerbated the previous trends of rising inflation and interest rates, but with a much-increased risk of recession, which continues to weigh on global equity valuations that now look cheap versus utilities as a whole. The MSCI Utilities Index is also cheaper than it was, but its valuation has been more stable reflecting the more-defensive nature of its earnings.

Manager's view

We live in interesting times!

As is discussed later in the performance section (see page 17), EGL has performed strongly YTD. Its investment sectors had a challenging start to 2022, particularly in Europe, but EGL's portfolio - aided by good stock selection, with a number of positions that benefitted from strong tailwinds - proved to be more resilient than the average. Markets have been very volatile and many sector and stock price moves have been top-down driven. Whilst the manager usually looks to take advantage of the opportunities that volatility throws up, Jean-Hugues has focused on the longer term and tried to keep turnover low in this year's difficult markets.

Macro driven markets

Markets have been very macro-driven recently, particularly during the last 12 months with the war in Ukraine and as inflation has increased significantly. Inflationary pressures, initially in response to the massive fiscal and monetary stimulus injected by governments and monetary authorities to prop up economies during the pandemic, have ballooned since Russia's invasion of Ukraine, with the resultant impact on commodity and particularly energy prices from the ensuing supply curtailments and sanctions.

The US is ahead of the curve

The US has moved quickest this year to get to grips with the strikingly high inflation levels - the Fed has raised short-term rates aggressively, the US dollar has been very strong, and the yield curve has flattened (Figure 3), even inverting for a portion of the curve. Historically, this flattening of yield curves has been supportive of US regulated utilities and this time has been no exception (with an increasing chance of recession, investors shift towards more defensive sectors).

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Ecofin Global Utilities and Infrastructure Trust

Figure 3: US yield curve as at 8 November 2022

5.00

4.75

4.50

4.25

4.00

3.75

3.50

3.25 1 mo 2 mo 3 mo 4 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

Source: US Department of the Treasury

Figure 4: EU area AAA-rated bond yield curve as at 7 November 2022

2.50

2.25

2.00

1.75

1.50

1.25

1.00 3 mo 6 mo 9 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

Source: European Central Bank

A steepening yield curve has been a headwind for equitiesin general. Utilities have also been weighed down by the uncertainty around energy policies with outstandingly high prices facing consumers.

In Europe, the situation has been more complicated

While inflation and interest rates have also been marching upwards in Europe, the picture has been more complicated (Europe energy markets have felt the impact of the invasion of Ukraine more severely) and so European utilities have underperformed their global peers. Jean-Hugues comments that European utilities have been the clear under-performers amongst global peers this year, especially when measured in sterling terms. Inflation and interest rates have marched higher in Europe too, the war in Ukraine has presented great economic and geopolitical uncertainty, and there was a steepening of yield curves in the first half of the year, arguably reflecting concern that European inflation would be higher for longer. Yield curves have begun to flatten again, reducing this headwind for utilities.

Europe has been quicker to embrace the move to renewables than the US.

European utilities are not a pack

Whilst there have been some big macro factors weighing on the sector this year, Jean-Hugues observes that European utilities are not a pack. He comments that there are big differences in their business models and that stock picking is key to avoiding the big mistakes. Europe has, on average, been quicker to embrace the move to renewables than the US (this is not to say that progress has not been made in the US, despite the policies of its former president Trump) and Jean-Hugues says the proportion of utilities' shares which are correlated with interest rates and yield curves (that is, which behave as bond proxies) has diminished due to significant changes in their business mixes over the last several years.

In Europe, in particular, dramatic commodity price increases have filtered through to power prices. Gas peaking plants tend to set the marginal price of electricity (although there has been much talk of decoupling the two), while coal prices have ballooned too, so traditional thermal generators have found themselves at the sharp end of rising costs. However, this dynamic really benefits the renewables generators as the power price received rises, yet they have incurred little or no additional cost of production (the initial outlay for modules, turbines and inverters may have increased but the price of wind and sunshine is still zero).

Update | 22 November 2022

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