Varun Anand, portfolio manager at Starlight Capital
Focus: Infrastructure stocks

MARKET OUTLOOK

The focus of the markets remains on COVID-19, as concerns are mounting regarding the current spike in cases globally, the shape of the economic recovery and the risk of a second wave. In addition, we have a very contentious U.S. presidential election set for November and escalating U.S.-China tensions. As a result, we believe the volatility experienced in the first half of 2020 will continue into the second half. In this uncertain environment, stock selection is going to be a key driver of outperformance. Investors should invest in equities that can weather a prolonged economic downturn, with a focus on resilient business models that generate strong free cash flow and have manageable leverage. This is precisely where infrastructure equities shine. While many companies have suspended or reduced dividends, the Starlight Global Infrastructure Fund has had fifteen dividend increases at an average of 6.7 per cent thus far in 2020.

We have increased our allocation to infrastructure technology and renewable energy, as both of these sectors are seeing limited impact from the coronavirus or, in some cases, a modest benefit. Within infrastructure technology, data centers and cellular towers are positioned extremely well to weather the economic slowdown, as remote working, digitization and increased data consumption continue to benefit these companies. We have increased our exposure to renewable energy, particularly solar and wind, as both technologies are experiencing efficiency improvements while costs fall, making them more affordable than fossil fuel generation in many areas globally.

The coronavirus and economic slowdown have not impacted all infrastructure equities equally. We reduced our exposure to airports and energy in the first quarter of 2020 and remain underweight, as these two infrastructure sub-sectors continue to face demand headwinds while their customers (airlines, oil producers) remain in a precarious financial position.

TOP PICKS

ATLANTICA SUSTAINABLE INFRASTRUCTURE (AY NASD)

Atlantica has a diverse portfolio of renewable energy, electric transmission and water assets located in North America, South America and Europe and the Middle East. It owns interests in more than twenty assets with nearly 2,000 megawatts of power generation and 1,100 miles of electric transmission lines with an average contract life of 19 years. In February 2020, Sustainalytics (an ESG rating firm) rated Atlantica as the top company within both the renewable power production and the broader utility industry and in the top 1 per cent in the global rating universe out of more than 12,000 companies. Q1/20 results showed limited impact from COVID-19 and we view the 6 per cent dividend yield as safe and poised to grow double digits this year. With interest rates at record lows, renewable investments continuing at a strong clip, we believe Atlantica is positioned extremely well to weather the uncertain economic environment while growing the dividend.

FORTIS INC (FTS TSX)

Fortis is a Canadian utility company with various entities across North America. Fortis primarily owns transmission lines, electric utilities and natural gas infrastructure. Over 99 per cent of total assets are regulated with no exposure to commodity prices and strong organic growth profiles related to the replacement and maintenance of existing assets. Fortis’ subsidiary, Tucson Electric Power, has set a target to reduce emissions by 80 per cent by 2035, which provides a low-risk opportunity to develop renewable energy over the next several years. Fortis has increased the dividend for 46 consecutive years and we expect this to continue in 2020 and beyond. It trades at a discount to U.S. utility peers despite similar growth prospects and a higher dividend yield (currently 3.7 per cent); we believe this gap will tighten as investors continue to seek safety and reliable income in this economic environment.

FISERV INC (FISV NASD)

Fiserv is a fintech company within the payments space, providing financial companies with technology they need to operate, including core processing systems, electronic billing and payment systems. As the world moves to a cashless economy where digitization and electronic payments are mandatory, we believe Fiserv is positioned well given its leading market share in the U.S. Fiserv is deeply embedded with its customers, often providing multiple products which in turn provide strong recurring cash flows and relative stability during a downturn, as evidenced by the strong earnings report in Q1/20. We also believe there is further synergy upside from Fiserv’s recent acquisition of FirstData. The company has the most attractive valuation amongst its peers despite having more defensive characteristics than its competitors, and we believe the company can grow earnings at double digits in 2020 despite the uncertainty in the economy.

PAST PICKS: JULY 8, 2019

INTERXION (INXN NYSE)
Aquired by Digitial Realty (DLR NYSE) on March 13.

• Then: $77.39
• 03/12/2020: $77.41
• Return: 1%
• Total Return: 1%

BORALEX (BLX TSX)

• Then: $19.91
• Now: $31.44
• Return: 68%
• Total Return: 62%

COMCAST (CMCSA NASD)

• Then: $42.63
• Now: $39.25
• Return: -8%
• Total Return: -6%

Total return average: 19%