Why Magellan is "unashamedly conservative" on infrastructure and the ASX stock they like

"We're unashamedly the most conservative in the way we define our investment universe. What we're trying to get to is three key tenets, which is defensiveness, inflation protection, structural growth."

And in a volatile geopolitical and macroeconomic environment like the one we have right now, infrastructure is arguably even better-equipped to deliver on the three qualities Karliner is looking for.

In this interview for Livewire's Infrastructure in Focus series, he explains why conservatism can actually be the best approach for investors, even when growth is the story, and the ASX infrastructure stock that delivers on Magellan global listed infrastructure’s three tenets.

"Infrastructure companies are local monopolies effectively, and they really stand to benefit from that inward view," he says.

"Think about the US as they increase industrial production domestically, that means more power demand for the utilities. It means more trucks on the road. It means more freight on freight rail. So all those things benefit infrastructure."

But the other side of a fraying political environment is that it "makes managing economies more difficult," says Karliner, and it's important to keep a close eye on how political developments across the globe are impacting the environment for infrastructure. 

Taking an optimal approach to infrastructure

The Magellan Infrastructure Fund is made up of a portfolio of 20-40 stocks, which research suggests offers optimal diversification of idiosyncratic risk, including across sectors and regions. 

"We are effectively taking a balanced portfolio view where we can offer that downside protection," he says. That means staying exposed to the big structural growth themes, such as power demand, but not being too impacted if that theme reverses. 

"We are, again, very conservative and that comes down to the key thesis that we want reliable cash flows for our investments."

Infrastructure fundamentally remains a long-term investment, and the Magellan team is constantly looking for opportunities where that compelling long-term opportunities have been mispriced in the short term. 

"We do spend a lot of time really digging into the underlying drivers of a company, the risks around that company, and we want to be able to take those positions where we think the market misunderstands it or is too focused on short-term factors rather than the long-term opportunity."

The ASX infrastructure standout and a global stock pick

"Tolls increased by inflation or a minimum threshold across their networks in Australia," says Karliner. "That gives you really good earnings growth through time."

A recent study showed only 16% of toll road trips are work commutes, with usage likely to grow regardless of broader economic conditions. 

"As you see increasing population growth and urban sprawl, people moving further out in the city - so longer trips - you get a lot of resilience in that even if we do have an economic weakness," he says. "We saw during the GFC, the urban roads held up extraordinarily well."

"Outside of construction-impacted Melbourne, the vast majority of Transurban's roads continue to grow through that period. So it's a very defensive company."

A similarly-placed global stock is Aena SME (BME: AENA), the Spanish airport giant. Like Transurban, it has shown continued strength through periods of economic uncertainty. 

"Extraordinarily resilient traffic outside of the COVID period that has grown continually since listing in 2015," says Karliner. "What we see there is again, part of that shift to low cost travel, part of the shift to increasing spending on leisure travel."

"During the GFC, we saw a pullback in leisure spend. It rebounded almost entirely the following year, international travel. So again, very resilient. We really like the attractive regulatory environment and the management team we think is excellent."

And that commitment to focusing on three tenets means investors should be well-positioned to avoid the worst of the current headwinds, while benefitting from the tailwinds, says Karliner. 

"Our conservatism means the vast majority of our universe can actually pass through inflation," he says. "So we're getting really well protected there from some of those themes." 

"There's a number of key structural growth themes that are underlying markets, whether that's AI and data centre growth leading to greater electricity demand. We see continued push out of renewables over time. 

For us, it's in the regulated space, whether it's greater spending on experiences, greater household formation, meaning more cars, more people driving on urban toll roads. They're all long-term structural themes that actually help grow earnings for our companies over the long term."

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