Premier Miton Global Infrastructure Income Fund Manager
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Bridges, broadband and Biden
There has been a huge focus on infrastructure in the USA in recent years, with the realisation that investment is desperately needed across many areas combined with a rare political consensus – to paraphrase, no-one ever lost an election promising to spend on infrastructure. In November 2021, the Senate gave uncommonly unified support to President Biden’s $1 trillion infrastructure bill – the “Infrastructure Investment and Jobs Act”, which provides federal funding across projects including highways, bridges, airports, broadband and electric vehicle charging. It is telling that The White House website information page on this Act has an example of an infrastructure project funded through the Act from each of the fifty states in the Union, perhaps indicating the drivers of the bipartisan support!
The Inflation Reduction Act – building for a cleaner future
We have written extensively on the Inflation Reduction Act, which was effectively the second leg of the Biden administration’s infrastructure programme, passed into law in 2022. Among its features was the augmentation of the provisions of the Infrastructure Act, underpinning spending on clean energy infrastructure with long-term tax breaks for investment. From the perspective of listed infrastructure investors, we believe that this offers unparalleled visibility on long-term returns from regulated utilities and renewable energy generation owners and developers, and we have a significant investment in these stocks in our fund.
Circling back to the Infrastructure Act, much of the federal spending into assets such as roads, bridges and airports is out of scope for investors in US infrastructure equities, as these assets tend to be held in public ownership at city, state, or federal level, rather than being owned by listed companies. However, one area where we do see a very attractive infrastructure opportunity in the listed space is in railroads.
There are six “Class One” railroad operators in the USA. Two are Canadian companies with extensive US networks – Canadian National and Canadian Pacific. The US-listed stocks are Union Pacific, CSX and Norfolk Southern, and the sixth network operator, Burlington National Santa Fe (BNSF) is owned by Berkshire Hathaway. The railroad networks are the backbone of the North American economy, moving bulk products such as grain, chemicals, and lumber as well as automotive products and intermodal crates.
The railroads, and in particular the Canadian-listed companies, have made huge strides in improving operational efficiency in recent years. In addition, railroads have seen a strong pricing environment. In many cases, such as bulk transportation, they provide the only practical means to move products to market. In other areas, such as intermodal crates, they are far more efficient than the alternative – moving crates by road in heavy trucks. It has also been estimated that, on average, moving a crate by truck produces four times the carbon emissions compared to moving the same crate by railroad. The result is a compelling proposition for investors.
In addition, we see the current macro-economic backdrop enhancing this positive narrative. Pandemic-related issues have seen US executives searching for ways to shrink and de-risk their supply chains. The pandemic has laid bare the fragility of the global supply chain and spurred companies to consider nearshoring critical protection to ensure timely access to the parts and finished products upon which they are reliant. The catalyst for this re-assessment has been a wave of port bottlenecks, parts shortages, and skyrocketing shipping costs that have shaken American businesses’ confidence in the global supply chain. We see onshoring as providing a major positive for US railroads.
We believe that Canadian Pacific has a particular opportunity driven by “near-shoring”, and the continued growth of Mexico as a supplier of parts and finished goods for the US economy, particularly in the automotive sector. Following its recent acquisition of Kansas City Southern, Canadian Pacific now has the only single-line service from Canada down through the USA and into Mexico, enabling the provision of effective transportation solutions for clients across North America.
Heavy metal? Us Railroads are just a part of the infrastructure tool kit.
Our railroad investments in the USA sit alongside a wide range of other infrastructure assets where we invest, including electricity transmission and distribution, renewable power generation, school buses, liquified natural gas export terminals, gas pipelines, and high-speed telecommunications infrastructure. A combination of constructive legislation, federal tax breaks, and underlying economic drivers makes us optimistic that these US investments will provide a positive outcome for investors over the years and decades ahead.