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The Case for Global Listed Infrastructure

Jeremy Anagnos, CFA, Portfolio Manager,
MainStay CBRE Global Infrastructure Fund
CBRE Clarion Securities

Portfolio Resilience and Growth Potential

Executive Summary

Global listed infrastructure companies have distinct investment characteristics that we believe make the asset class a strong complement to investor portfolios. The asset class may provide a unique combination of defensive characteristics and long-term growth potential. We explore listed infrastructure’s historically attractive risk-adjusted returns and current relative valuation, as well as the secular investment themes driving increased investment in the asset class and value creation for investors.

Key Insights

Essential Assets Infrastructure companies own the physical assets that provide essential services that underpin society’s function and economic growth.

Portfolio Resilience Listed infrastructure has historically delivered attractive income-driven total returns across market cycles. The asset class may mitigate portfolio downside risk.

Attractive Valuations Listed infrastructure has historically been attractively valued relative to equities and fixed income. Also, listed infrastructure has traded at a double-digit discount to the value of similar assets in private markets.

Long-term Secular Tailwinds1 Investors may benefit from listed infrastructure’s critical role in the world’s decarbonization initiatives and the digital economy’s enablement.

A Strong Complement Listed infrastructure may enhance portfolio diversification. We recommend that investors consider funding listed infrastructure from an allocation to global equities or from other real assets.

Essential Assets

Global infrastructure provides the structures and systems that are essential for society to function. It consists of physical assets that are difficult to replace. Such assets often benefit from monopolies and inelastic demand, which are sources of their ability to provide stable cash flows over long periods, which means listed infrastructure is less affected by economic cycles than other investments. Government regulation and oversight often limit competition to global infrastructure providers.

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Portfolio Resilience

Listed infrastructure provides the potential for predictable income and cash flow growth, often guaranteed by long-lived contractual or regulated revenue streams for essential services. As a result, listed infrastructure returns tend to be less sensitive to economic cycles. Listed infrastructure is a resilient asset class that seeks to provide attractive long-term growth and total return potential as well as mitigate portfolio downside risk during market shocks.

Attractive Risk-Adjusted Returns Across Cycles

Listed infrastructure has historically provided attractive risk-adjusted returns across market cycles outperforming global equities with less volatility over the trailing 20-year period.

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Relatively Stable and Predictable Cash Flows

Listed infrastructure’s total return has been supported by relatively stable and predictable cash flows, which are less economically sensitive than global equities and have grown in excess of inflation over time.

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Consistent Income Growth

Listed infrastructure returns have been driven by both price and income appreciation. Over the last 20-years, income growth has accounted for approximately 50% of listed infrastructure’s total return.

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Downside Risk Mitigation with Upside Potential

Over the past 20-years, listed infrastructure has captured only 65% of the global equity market downside while capturing more than 80% of the market upside.

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Attractive Valuations

Trading at a Discount to Equities not seen Since the Global Financial Crisis

Due to their stable cash flows and predictable nature of their growth, listed infrastructure has historically traded at a premium multiple relative to global equities. As of June 30, 2020, listed infrastructure was trading at a 5% discount, well over one standard deviation below its average, and levels not seen since the 2008 Global Financial Crisis. The 15% gap in the current discount to the long-term average premium offers investors a significant potential return tailwind to the investment case.

Dividend Yield Spreads are Well Above Average

Relative to corporate bonds, listed infrastructure is equally discounted. Over the long-term, listed infrastructure’s dividend yield has tended to be about 1.7% below corporate bond yields. As of 6/30/2020, listed infrastructure was offering a dividend yield premium to corporate bonds, a rare occurrence. We believe this is particularly compelling when you consider that listed infrastructure companies have historically delivered dividend growth at a compound average growth rate of 7%6, as compared to the fixed coupon rates of corporate bonds.

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Discounted Relative to Private Market Values

Relative to their underlying assets, listed infrastructure is also trading at a sizeable discount. We estimate listed infrastructure trades a 20% discount to the value of similar private market assets. We tracked more than 75 deals where private market participants acquired core infrastructure assets. We find that the average EV/EBITDA multiple paid by private buyers has been nearly 14.4x. By comparison, the listed infrastructure market traded at an average 11.8x multiple over the same time. Our private market colleagues confirmed that private market multiples have remained firm during the COVID-19 crisis.

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Long-Term Secular Tailwinds

Capital investment in underlying assets that earn a contractual or regulated rate of return drives the growth potential of listed infrastructure. Investors may benefit from the consistent organic cash flows earned on investments to enhance and repair aging assets to maintain their baseline level of service and safety. Also, we believe listed infrastructure to be one of the best-positioned asset classes to benefit from the long-term secular trends tied to global decarbonization initiatives and the rise of the digital economy.

Critical Role in Decarbonization Initiatives

Political pressure to decarbonize continues to mount in industrialized countries and curbing the greenhouse effect has become a decisive factor for energy policies worldwide. Infrastructure companies across each sector are playing a role in reducing carbon emissions that affect long-term change through critical investments in the replacement of existing aging infrastructure and the development of new, sustainable infrastructure. For investors navigating recent market volatility and the prospect of a downturn in traditional assets, investing in listed infrastructure strategies offers both risk mitigation from equity market performance, and the chance to not only invest in sustainability oriented companies but to help catalyze the decarbonization process. Investment in sustainable assets at returns in excess of their cost of capital drives future growth potential in earnings and dividends for listed infrastructure companies.

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The Backbone of the Digital Economy

The coronavirus is reshaping the way society lives and works. The wide-scale digital adoption by individuals and across industries will outlast the pandemic, well after global quarantines and stay-at-home orders are lifted. The further growth of mobile data and cloud-computing traffic and the development of new technologies only accelerate the structural need for enhanced communications infrastructure. As digitization increases, investors may benefit from growing demand for critical assets owned by listed infrastructure companies, enabling interconnectivity and driving the growth of the digital economy.

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A Strong Complement

We believe that listed infrastructure is a strong complement to investor’s portfolios. Listed infrastructure may enhance portfolio diversification and income growth potential while mitigating downside risk. We recommend that investors consider funding an allocation to listed infrastructure from global equities or other real assets.

Real Assets As a component of an allocation to real assets, listed infrastructure may enhance inflation linkage and income growth potential while reducing economic sensitivity and commodity price risk. Use listed infrastructure as a standalone allocation, a replacement for MLPs, or a complement to a real estate or private infrastructure investment.

Global Equities A listed infrastructure portfolio has limited overlap with a typical global equity investment. Adding listed infrastructure to a global equity allocation may enhance current income, reduce portfolio volatility, and provide downside protection.

When compared to a traditional core equity allocation, the MainStay CBRE Global Infrastructure Fund (VCRIX) has historically offered global and sector diversification with a high active share, and lower historical volatility and downside capture. The fund has also generated reliable dividend income.

Regardless of the source for the implementation, listed infrastructure provides investors with the potential for attractive risk-adjusted returns supported by its consistent cash flows and rising secular demand for essential services.

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1 A tailwind describes an economic condition or situation that will help move growth higher. For example, falling gas prices will help a delivery company be more profitable.

2 Global Bonds: Bloomberg Barclays Global Aggregate Bond Index, Global Equities: MSCI World Equity Index, Global Infrastructure: FTSE Global Core Infrastructure 50/50 Index. Index performance reflects the reinvestment of earnings and gains but does not reflect the deduction of any fees or expenses, which would reduce returns. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. Refer to endnotes for definitions of terms and indices.

3 Global listed infrastructure universe is represented by the CBRE investable universe, Global Equities are represented by the MSCI AWCI Index and U.S. Inflation is represented by the U.S. Consumer Price Index. This information is subject to change and should not be construed as investment advice. An index is unmanaged and not available for direct investment. For comparison purposes, company operating earnings and the U.S. Consumer Price Index values were rebased to 100 on 12/31/19.

4 Returns represents the FTSE Global Core Infrastructure Index performance reflects the reinvestment of earnings and gains but does not reflect the deduction of any fees or expenses, which would reduce returns. An index is unmanaged and not available for direct investment. Past performance is not indicative of future results. Refer to endnotes for definitions of terms and indices.

5 Global Equities: MSCI World Index, Global Infrastructure: Represented by the UBS Global Infrastructure & Utilities 50/50 Index until it ceased on February 28, 2015 and then replaced by the FTSE Global Core Infrastructure 50/50 Index beginning March 1, 2015. An index is unmanaged and not available for direct investment. Up-capture ratio measures how the fund performed relative to the index during periods when index has risen. Down-capture ratio measures how the fund performed relative to the index during periods when index has fallen. This information is subject to change and should not be construed as investment advice. There is no guarantee that risk can be managed successfully. Index returns do not reflect any fees. Past performance is no guarantee of future results. Refer to endnotes for definitions of terms and indices.

6 CBRE Clarion Infrastructure investable universe as of 12/31/19.

7 Global Equities are represented by iShares MSCI ACWI ETF; Global Infrastructure is represented by SPDR S&P Global Infrastructure ETF, ProShares Dow Jones Brookfield Global Infrastructure ETF. Information is the opinion of CBRE Clarion, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Forecasts and any factors discussed are not a guarantee of future results. It is not possible to invest directly in an index. Past performance is not indicative of future results. Refer to endnotes for definitions of terms and indices.

8 Corporate Bonds are represented by Moody’s Bond Indices Corporate BAA; Global Infrastructure: Represented by the UBS Global Infrastructure & Utilities 50/50 until it ceased on February 28, 2015 and was then replaced by the FTSE Global Core Infrastructure 50/50 Index beginning March 1, 2015. Information is the opinion of CBRE Clarion, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Forecasts and any factors discussed are not a guarantee of future results. It is not possible to invest directly in an index. Past performance is not indicative of future results. Refer to endnotes for definitions of terms and indices.

9 CBRE Clarion Infrastructure investable universe as of 12/31/19.

10 Comparison of average EV/EBIDTA multiples of 88 private infrastructure market transactions from 1/1/16 through 12/31/19 vs. listed infrastructure market multiples over the same period.

About risk

Before considering an investment in the Fund, you should understand that you could lose money.

The investment strategies, practices and risk analyses used by the Subadvisor may not produce the desired results. Investments in infrastructure-related securities will expose the Fund to potential adverse economic, regulatory, political, legal and other changes affecting such investments. Issuers of securities in infrastructure-related businesses are subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection with capital construction programs, high leverage, costs associated with environmental or other regulations and the effects of economic slowdowns. MLPs carry many of the risks inherent in investing in a partnership. State law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded investors in an MLP. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The risks of investing in emerging markets include the risks of illiquidity, increased price volatility, smaller market capitalizations, less government regulation, less extensive and less frequent accounting, financial and other reporting requirements, risk of loss resulting from problems in share registration and custody, substantial economic and political disruptions, and the nationalization of foreign deposits or assets. Small and mid-cap stocks are often more volatile than large-cap stocks.

Because the Fund concentrates its investments in securities issued by companies principally engaged in the infrastructure group of industries, the Fund may be subject to greater risks and market fluctuations than a fund whose portfolio has exposure to a broader range of industries.

Portfolios concentrated in infrastructure securities and Master Limited Partnerships (“MLPs”) may experience price volatility and other risks associated with non-diversification. Investment in infrastructure related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors. MLPs often own interests Related to the oil and gas industries or other natural resources but may finance other projects. As such, MLPs will be negatively impacted by economic events adversely impacting that industry. Investments in MLPs may offer fewer legal protections than investments in corporations, and limited voting rights. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors, as well as increased volatility and lower trading volume. Other risks of the Fund include but are not limited to: Company; Convertible Securities; Currency; Derivative Instruments; Investment Model; Liquidity; Market; Market Capitalization; Other Investment Companies; and Securities Lending risks.

The CBRE Clarion Infrastructure investable universe includes infrastructure companies that derives at least 50% of its revenues or profits from, or devotes at least 50% of its assets to, the ownership, management, development, construction, renovation, enhancement, or operation of infrastructure assets or the provision of services to companies engaged in such activities.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The Bloomberg Barclays Global Aggregate Index is a measure of global investment grade debt from 24 local currency markets. This multi- currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

The FTSE Global Core Infrastructure 50-50 Index captures the performance of listed infrastructure securities in both developed and emerging markets. Constituents are selected by further screening companies who derive revenues from infrastructure related activities within particular Industry Classification Benchmark (ICB) sub-sectors of the FTSE Global All Cap Index. FTSE applies minimum infrastructure revenue thresholds of 65% for constituents of the Core Infrastructure indices.

The FTSE Developed Core Infrastructure Index and FTSE Global Infrastructure Index are part of the FTSE Core Infrastructure cap-weighted indexes that are diversified across six FTSE-defined infrastructure sub-sectors to reflect the performance of infrastructure-related securities worldwide.

Moody’s BAA Corporate Bond is an investment bond that acts as an index of the performance of all bonds given a BAA rating by Moody’s Investors Service.

The MSCI ACWI Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International (MSCI) and is comprised of stocks from 23 developed countries and 24 emerging markets.

The MSCI Emerging Markets Index is used to measure equity market performance in global emerging markets.

The MSCI World Index captures large and mid-cap representation across 23 developed markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

Beta is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole.

Down-capture ratio measures how a fund, index, or other market proxy performed relative to the index during periods when index has fallen.

Up-capture ratio measures how a fund, index, or other market proxy performed relative to the index during periods when index has risen.

EV/EBITDA is a ratio that compares a company’s Enterprise Value. It looks at the entire market value rather than just the equity value, so all ownership interests and asset claims from both debt and equity are included. (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA).

Standard deviation is a measure of risk that an investment will not meet the expected return in a given period.

Lipper Rating: The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award. For more information, see lipperfundawards.com. Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper. The MainStay CBRE Global Infrastructure Fund is winner of the Refinitiv Lipper Fund 2020 Award for best performance for the 3-year period among 19 Global Infrastructure Funds.

Refinitiv Lipper Fund Awards, ©2020 Refinitiv. All rights reserved. Used under license.

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