abrdn ASGI - Fund Update February 2024

In this episode, we sit down with Josh Duitz, a portfolio manager on the abrdn Global Infrastructure Income Fund (ASGI) for an overview of the infrastructure market and insight into Josh's investment strategy. 

Transcript

Mike Taggart

Welcome to the latest podcast for the Aberdeen Global Infrastructure Income Fund. Ticker symbol ASGI. I'm Mike Taggart. Aberdeen's U.S. Closed End Funds Specialist. Today we have Josh Yeats, Aberdeen's head of global income and a portfolio manager on SGI. Josh, thank you for joining us today. 

Josh Duitz

Thanks for having me, Mike. 

Mike

Josh why should U.S. Investors Consider allocating Capital to global Infrastructure?

Josh

It's interesting, Mike. I actually think this is an ideal time to allocate to global infrastructure. I'm not sure how many of our viewers have seen that recently, BlackRock announced the acquisition of Global Infrastructure Partners, an independent infrastructure fund for approximately 12 and a half billion dollars. On the call, Larry Fink, the CEO of BlackRock, said infrastructure is one of the most exciting long term investment opportunities as a number of structural shifts reshape the global economy.

 We couldn't agree more. We think it's an extremely exciting time to invest in infrastructure. The several drivers to that list are just a few of them. One of them is population growth. The world's population has doubled over the last 50 years, and the number of people living in cities or urbanization has tripled over that time. If we look out to 2050, the world's population is expected to grow another 22%.

 And the number of people living in cities to grow by almost 50%. If we break it down and look at megacities which are considered metropolitan areas with 15 million people or more, in 2000 there were seven of those. By 2018 there are 12, it's projected by 2035, there'll be 25 megacities, and the majority of those mega cities are in emerging and developing markets.

 All of those people are going to need infrastructure, they're going to need sewage, they're going to need water, electricity, cell towers. So we’re  excited about the long term opportunity. The World Bank estimates developing countries alone need to spend about $4.2 trillion annually on infrastructure investments. So we see this great tailwinds and exciting opportunities to invest in infrastructure over the next decade.

Mike

Okay. Well, that's quite different from what I expected because when I think of infrastructure, I think of crumbling bridges and roads here in America. You know, so, you know, that sounds you know, it's an exciting space. A lot happening, seems primed for growth. So your team's investment process, you know, is it is it looking for that growth? Is it looking for value?

How's how's the team structured? You know, can you walk us through those sorts of things?

Josh

Sure. So we've been investing in infrastructure for over 15 years and we really take a top down, bottom up approach to infrastructure investing or really trying to see different themes where there will be infrastructure investing, but we won't invest unless we actually see value in the companies that we're investing in.

 And value means that the intrinsic value we believe is lower than where the market is pricing it at. We have a dedicated team on our infrastructure pod who just focus on infrastructure. In addition to our dedicated team, we rely on over 100 analysts and portfolio managers globally at Aberdeen to help us. We love having those boots on the ground globally.

 We think that's a huge competitive advantage. We also take a really diversified approach to infrastructure investing. We want to be diversified both by stock sector and region within our portfolio, and we think it's a huge advantage to invest globally. For instance, if we're looking at a road company in Australia, we can look at that comparatively to road companies in emerging markets, through Europe.

 So we really get that comparison and we think that's another competitive advantage to invest in globally. So again, it's a top down, bottom up approach, but really it comes down to each investment, the fundamental value of each investment. 

Mike

Right. So to go to your road example, so you know that road investment might look good, might look relatively cheap compared to another road investment in Australia.

But then you compare that to a road investment in India and maybe it doesn't look so cheap anymore. The road investment in India looks more attractive, something like that.

Josh 

Globally and by region, by region. And it's not only looking at. Right. That's the first part and looking at the valuation of it. But then for a road specifically, we want to understand the fundamentals of that and what do we mean by that?

 We want to understand the concession contract. So if a road only gets five years left on the concession versus 40 years, that 40 years should have a higher valuation to it. Additionally, we want to understand that concession contract, not only the length of it, but the ability to raise your total or tariff If you do not have that ability to raise your total or tariff, it's less attractive than if you could raise it with inflation on a yearly basis.

 And what's even more attractive is when you can find a concession that allows you to raise it as much as you want in each year. So you really want to look at each and every investment separately. And just looking at the valuation just scratches the surface. And that's why it's so important to have those analysts and investors globally so we can really understand the different nuances of the contracts.

Mike

Excellent. Now, I've heard you talk before about four sectors of infrastructure, you know, transportation, communication, energy and utilities. And yet, when I look at the most recent fact sheet, I see that industrials make up about a third of the portfolio. And I see that. And I'm thinking industrials, you know, that's capital goods companies, aerospace construction companies. But that's not really what you're investing in.

 So can you explain that a little bit? 

Josh 

Sure. Well, we say industrials for the most part. We really consider that transportation. That's what we're investing in our airports and our roads and our rails and our ports of globally. That's what we mean by that's the sector, industrials encompass all of that. So we're very excited about the transportation sector.

 For example, airport traffic has grown about one and a half times global GDP over the past 20 plus years. And when there's events such as 911 or SARS or the pandemic, that growth slows down or goes negative. But then you go back to that same growth trajectory. So we're very excited now that we've seen airport traffic exceed 2019 levels in many regions.

 So we think there's great opportunities to invest in the airport sector. And when you're investing in the airport sector, not just investing for that traffic growth and the fees you collect, but also now as many of us know, when we travel, it's actually we go into a mall. The airports, the airport operators have recognized that they want to monetize the passengers for that airport.

So many times you don't even see your gate till a half an hour before the before you have to board. And that's not because you don't the airport doesn't know which gate you're going to. It's because they want you sitting in the restaurants, spending in the stores, spending money, and that's another way the airport operators make money. 

Mike

Well, thanks for that clarification on those details.

 And then on the renewable energy transition, this portfolio invests in that. Billions of dollars are flowing into renewable energy. Are these utilities or energy companies that you're investing in? 

Josh 

First, I'll just correct you, Mike, if that's okay. 

Mike

Go ahead, please. 

Josh

I would say trillions of dollars, that's an opportunity that he said, trillions of dollars invested in the energy transition out to 2050.

 And that estimate varies widely between 100 and $300 trillion. So there's a huge, huge opportunity set in the energy transition. So but for the most part, we're investing in utilities and investing in the renewable side. We won’t generally invest in an energy company where they take spot price risks. So that's how we really distinguish our renewable investments. We want a renewable company who are signing a PPA, another side, a power purchase agreement.

 So this will give some visibility to your earnings and revenues along with visibility on your cost of your matching it. So it's a bit less risky than just speculating on energy prices or power prices. So those…

Mike 

Well, what's a power purchase agreement? What is that? 

Josh 

So it's basically you'll see that renewable energy company will sign a long term agreement with a user of that energy.

 So, for instance, you might side with a company such as Microsoft who wants that renewable energy for the next 15 years, and they'll agree to a certain price, are willing to pay for the output of that wind farm or energy farm or solar farm. So it locks in that price and locks in your revenue stream. And then, you know, the cost side and you really just try to make a spread of how much you spend and your revenues on the other side.

Mike

And what percentage of, you know, say, energy in the U.S. is now coming from, say, solar or wind farms? 

Josh 

Solar is about 10%. I'm sorry. Wind is about a little over 10%. That energy generation and solar is between four and 5% right now. So we're seeing renewables really now start to make up a decent part of our energy mix here in the US.

Mike

And how fast is that growing every year? 

Josh 

In 2022 I've seen the latest numbers. I haven't seen it for 2023. The wind increased by about 100 basis points of increase from nine to roughly a little over 10% and solar increased by about 80 basis points. So we're seeing that really take hold now and the fruits of the labor of those investments.

 So we're seeing results of it. 

Mike

Wow, that's crazy. And then finally, communications. So cell towers, right? Occasionally I get asked why the fund is invested in real estate, but unless I'm mistaken, that's actually cell towers, too. But why cell towers? Josh, you like it? I drive around. They're already everywhere. So where's the growth in cell towers? 

Josh 

You are correct by saying that when you look and it says real estate investments, those are rates, but they're cell tower rates.

 So they are all the communication side. And we have built out the cell towers. But that's really we've built it out for 4G now, transition into 5G, and that has been growing 20 to 40% per year. It's expected to grow that for the next decade as we transition from 4G to 5G. For instance, if we have autonomous driving cars at one point, which I think we well, that's going to use as much data in one hour as this iPhone uses in 3000 years.

So in order to make that happen, you really need denser towers and more co-location locations on the towers. So that's where we think there's a good opportunity for organic growth for the tower sector. In addition, we think it's a great business as a standalone business because in the US, for instance, every year they get to raise how much they charge in the cell companies by 3%, and that's generally standard in the contracts.

 So we think right now it's a great business and there's growth from it and that's why we're so excited for it. And that's just in the US and certainly as a build it out, even 4G in emerging markets, you need more and more cell towers. It's just the cheapest way to deploy the spectrum that all these companies have bought and allows us to communicate through sell through our cell phones or Zoom or whatever else we're using it for.

Mike

Yeah, well, I don't think any of that's ever gone away. Like you said, more and more data, right? We're using more and more every day, so. Well, thank you, Josh, for that update on ASGI. It's always a pleasure speaking with you. 

Josh 

Great. Thanks for having me, Mike. Looking forward to the next time. 

Mike

And thank you, everyone, for listening to this podcast.

There are three convenient ways to learn more about ASGI on the Internet visit abrdnasgi.com. Email us at Investor.Relations@abrdn.com, or give us a call at 1-800 522 5465. I'm Mike Taggart of Aberdeen. Thank you for listening.

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