ClearBridge’s Benchmark-Unaware, IRR-Driven Approach to Listed Infrastructure

ClearBridge maintains a disciplined view in defining the listed infrastructure universe, with minimum thresholds for the proportion of company assets that are infrastructure-driven as well as cash flow stability and liquidity. We use a true private markets framework for investing in listed infrastructure, with a focus on internal rates of return (IRR) rather than other valuation methodologies and a benchmark-unaware approach to portfolio construction. We look for a tight range of outcomes in our IRR scenarios, which generally have a time frame of five years and consist of capital gain and dividend contributions, adjusted for inflation as well as real costs of equity, liquidity and sustainability.

In being benchmark unaware, we build portfolios to achieve appropriate risk-adjusted returns and maintain the flexibility to move among sectors, regions (including emerging markets) and market caps. Rather than constrain position sizes to a benchmark, we size them according to our excess return projection and forecast dividends, using position limits and a continuous program of portfolio risk assessment. Over half of excess returns for our infrastructure strategies come from names not held in common public infrastructure benchmarks (Exhibit 1).

Exhibit 1: Return Contribution from Non-Benchmark Holdings - Five Years Ending March 31, 2022

Our ability to move among sectors, regions and market caps stems from the diverse range of infrastructure backgrounds among our investment team, including M&A and unlisted infrastructure, debt and equity financing, sell side and buy side, government and regulation. This team enables coverage of Australasia, Asia, Europe, the Middle East, North America and Central/South America across water, gas, electricity, transport and communications sectors.

ClearBridge’s differentiated approach to listed infrastructure is evident in its diversification benefits and its low correlation to equities. This has translated into an attractive asymmetric upside/downside market capture (Exhibit 2).

Exhibit 2: ClearBridge’s Asymmetric Upside/Downside Captures

Investors who seek to improve the risk-adjusted outcomes of their traditional equity and bond portfolio, while receiving stable and growing income in a secular growth environment, should examine the proportion of their portfolio they have allocated to global listed infrastructure strategies.