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CEFA:
Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association. Today we are joined by Hinds Howard with CBRE Investment Management and Portfolio Manager of the MainStay CBRE Global Infrastructure Megatrends Fund, ticker (NYSE:MEGI). CBRE is the sub-advisor to the fund and New York Life Investment Management is MEGI’s manager.
Hinds, we’re happy to have you with us today.
Hinds Howard:
Yeah, happy to be here.
CEFA:
Hinds, the MEGI investment strategy has a focus within the infrastructure space. The fund is thematic and invests across global markets, primarily in income producing equities. Can you discuss the investment strategy for the fund and why you see particular opportunity in the themes the fund is focused on?
Hinds Howard:
Yes, that’s a great place to start. MEGI was launched in October, 2021. It was designed to be an actively managed portfolio, built around three enduring secular themes impacting global infrastructure investment, and we call those investment themes mega trends. Owners of infrastructure assets grow by investing capital with defined returns, so by aligning the portfolio with these mega trends, we can deliver an attractive total return with an emphasis on current income. And with that long buildup out of the way, the three mega trends are decarbonization, asset modernization and digital transformation.
CEFA:
Your strategy involves allocation across both investment themes and global markets. Can you further describe these themes and why they are relevant to listed infrastructure?
Hinds Howard:
Sure. By 2040, we estimate over $100 trillion of investment will be required to repair, modernize, and build new infrastructure assets critical to societies around the globe. The landmark Inflation Reduction Act passed earlier this year that had a direct and indirect support for renewable energy assets is just a small part of the global super cycle of infrastructure investment spending, which is likely to occur over the next 20 years.
The spending is not going to come from governments, but government policies can incentivize investment. Much of the necessary investment will actually come from the publicly traded companies that we can invest in through MEGI. Utilities, toll road operators, pipeline companies, and others will invest in existing and new infrastructure to meet the growing needs related to our mega trends. Those investments will help drive growth in earnings and income over time. The counter cyclical investment needs and the visibility of returns on the investments are the critical components that support our ongoing dividends at MEGI.
Taking the mega trends one by one. Decarbonization is the most prevalent in the MainStay CBRE Global Infrastructure Mega Trends Fund. We believe decarbonization is an unimpeachable theme. Over 70% of the global economy has a net zero carbon emissions target. It’s not just the countries. It is multinational corporations and individuals driving this trend. The investment required in this area is the greatest of any sector. To meet our climate goals, utilities are investing heavily across the spectrum of clean energy infrastructure assets, including wind, solar, battery storage, and smart grid technology. This investment is driving a long runway of growth in company cash flows and dividends. Just over 50% of our portfolio is tied to this decarbonization mega trend.
Asset modernization is the second mega trend. Infrastructure assets don’t just need to be repaired, although they certainly do need that, but they need to be modernized to meet today’s new economy standards. Within this theme, we are investing in water utilities, gas utilities, midstream corporations and transportation infrastructure companies. Approximately 30% of our portfolio is tied to asset modernization.
The third mega trend is digital transformation. The tech innovators driving the transformation to all things digital pay rent to digital infrastructure companies. Fiber networks, towers, satellites, and data center assets must be expanded to meet the need for more space from these technology companies. As the tech innovators grow, they will pay more rent to our companies, which will grow their cash flow. Approximately 15% of our portfolio is invested in digital transformation related stocks.
We see opportunities for companies across the globe tied to these mega trends. Getting exposure to these themes requires a global portfolio in our view, and the current portfolio is allocated approximately 56% to stocks outside the US. But importantly, less than 6% into emerging markets. So we are talking about core infrastructure assets in developed markets with supportive regulatory environments.
CEFA:
Hinds, the Federal Reserve has aggressively raised interest rates for much of 2022. Inflation has been high and economic growth is slowed. Where do you see the investment markets currently and what is your outlook for 2023?
Hinds Howard:
Infrastructure fundamentals are accelerating into 2023. We anticipate company earnings growth of around 8.5% in 2023, up from 6% last year, even with higher interest rates and weaker economic conditions. This is differentiated compared to broad equities. We also have revised assumed interest rates across the models in our universe and reviewed balance sheets across the portfolio to identify near term debt maturities and potential risks due to rising interest rates.
Some quick takeaways from that analysis. Less than 10% of the coverage universe has floating rate debt exposure. Less than 15% of debt is set to mature in the next three years. The earnings impact from refinancing in the current environment is manageable and can be offset by inflation capture and regulated cost of capital mechanisms. Infrastructure companies tend to match long duration debt with their long duration assets and are well positioned to weather sustained high cost of debt.
We believe we’re in the first inning of potential infrastructure out performance. We see the asset class poised to regain lost ground from the previous five years and further assert its long-term historical out performance relative to global equities and bonds that we’ve seen over the last two decades. Periods of moderating and contracting economic growth and higher inflation have generally boded well for infrastructure out performance. Infrastructure boasts a historical track record of multiple expansion during such periods of increased uncertainty.
CEFA:
Why is global infrastructure a well-suited asset class for income-oriented investors and the closed-end fund structure?
Hinds Howard:
That’s a great question. Infrastructure companies have straightforward, income focused, business models that seek to or that can produce cash flow and income. The asset class is well suited for the closed-end fund structure. Listed infrastructure companies have very durable and resilient earnings and cash flow potential. Even during the global financial crisis and in the COVID downturn listed infrastructure companies dividends grew in aggregate. We believe eight to 9% dividend growth per annum over the next three years across the infrastructure universe is possible, which would be well above the long-term average.
These characteristics give us a high level of confidence in our current monthly dividend that equates to more than a 9% yield today, with some added potential to grow that dividend over time. Under the funds managed distribution policy, our shareholders should anticipate that our monthly distributions may be covered by both net investment income as well as any capital gains we realize through the course of active management. The fund does employ leverage, which stands at around 30% today, but has an upper limit of 33.3% of the managed assets of the fund. Leverage is an important tool for the fund to be able to deliver on its objective of a high level of income for investors, which is generally a focus for closed-end fund investors. We use a low-cost, non-structural form of leverage through a credit facility with a major financial institution.
CEFA:
Hinds, how do you see this global thematic infrastructure strategy best positioned in an investor’s diversified portfolio? And likewise for an investor that is more income oriented?
Hinds Howard:
Well, the asset class is underrepresented in investor portfolios and has less than 3% overlap to the MSCI World Index. An investment in MEGI sourced from a broad equity allocation can potentially provide meaningful benefit to the return and risk outcomes based on historical performance of the asset class. The global MEGI portfolio provides broader exposure and diversity of sectors and regulatory regimes, maximizing your exposure to secular growth themes while increasing your ability to manage risk. The large dislocation in the market price of MEGI today relative to the net asset value of the fund provides investors with an opportunity for a relatively high level of current income in an asset class that we believe has unique countercyclical tailwinds heading into an uncertain 2023.
CEFA:
Hinds, thank you for taking the time to share your thoughts with us today.
Hinds Howard:
My pleasure. Thanks for the opportunity.
CEFA:
And we want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website.
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