CEF Insights: MEGI & the Growing Need for Infrastructure

David Leggette:

You're very welcome. It's my pleasure.

David Leggette:

Happy to do that. MEGI is a closed-end fund, trades on the New York Stock Exchange. The portfolio is actively managed. It is built around three megatrend investment themes, and it seeks to deliver high total return with an emphasis on current income. It's MEGI's thematic orientation that we believe makes the portfolio interesting, and it's a key differentiator relative to its peers.

The three themes are decarbonization, asset modernization, and digital transformation. These themes are reshaping demand for infrastructure assets and driving greater required investments by these companies, and therefore enhancing the earnings and income growth of the companies that we own in our portfolio.

Within these themes, we provide exposure to the core infrastructure assets. Core infrastructure assets are monopolistic in nature, they play an essential part of our everyday lives, and as a result, demand for use of these assets is relatively consistent, regardless of the macroeconomic conditions. So, within these themes, decarbonization, which represents about 50% of today's portfolio, we're investing in utilities globally, as well as contracted power businesses. Within the asset modernization theme, which is 35% of today's portfolio, we're providing exposure to toll road assets, airports, and also midstream energy assets. Within digital transformation, about 15% of the portfolio, people are investing in cell towers and data centers. Given the secular nature of these themes, they all remain relevant today, and we believe will be drivers of outsized demand over the life of MEGI's twelve-year term.

David Leggette:

MEGI pays distributions on a monthly basis. The current rate is 12 and a half cents per share monthly, which is $1.50 annualized. The fund utilizes a managed distribution policy, which allows the fund to include realized capital gains as well as income in each of its regular monthly distributions. Our goal is to maintain a relatively attractive distribution rate, which over time does not exceed the NAV growth of the fund, thereby preserving the fund's capital base and limiting return of capital. Given the consistent fundamentals, earnings and income growth, of the underlying portfolio we were able to increase our distribution by 15% in July of last year.

David Leggette:

Thank you for that question, and since it's an election year, I thought I would highlight that historically infrastructure has been a bipartisan asset class. I went back and looked at the eight presidential elections since 1992 and would like to point out that infrastructure returns were positive in all of those election years, with the exception of global financial crisis in 2008 and in COVID, 2020, where these black swan events overwhelmed the market sentiment of what may be a Democrat or Republican win might mean for the asset class.

Even when you include the negative returns of 2008 and 2020, global infrastructure on average over the eight election years outperformed broad equities by a wide margin. Listed infrastructure globally up 6.2% on average, while global equities were only up 1.6% on average. While Democrats and Republicans may share different views, we expect that policy under either administration will be pro infrastructure, and the primary reason for that being infrastructure's critical role in job creation and overall economic growth. It's a favorable policy, which we expect to continue, which incentivizes increased investment. It's the policy we believe is more important to our companies than actual government spending and receiving tax dollars. The ongoing increased investments our companies will make in their infrastructure networks are primarily self-funded, and importantly, the returns generated on their investments regulated contractual returns are what drives the consistency of earnings and income growth, which is a hallmark of the asset class.

David Leggette:

We believe that the listed infrastructure market bottomed in October of 2023 when the 10 year peaked in the US close to 5%. While the recovery has not been in a straight line, we maintain a constructive outlook for the asset class. Infrastructure offers investors a compelling combination of historically attractive valuations relative to broad equities with earnings growth that currently is well above the asset class's long-term average. Next year, we expect earnings for infrastructure companies to grow by 8%, well above its long-term average of 6%. So, despite the derating of listed infrastructure relative to broad equities, the fundamentals of the asset class have continued to improve. I think that's key point number one.

Key point number two, in terms of the opportunity, is the emergence of a key secular trend in 2024 that we believe MEGI's portfolio is well positioned to benefit from. And this secular trend is the material increase in energy demand globally. In the US, for example, demand for electricity is expected to increase by 188% by 2030, so this increased demand is being driven by the electrification of everything, vehicles, appliances in your home, the on-shoring of US manufacturing, and finally, the growth of data center development, which is driven by generative AI.

With respect to data centers, over the same timeframe through the end of this decade, data centers are expected to go from 2.5% of overall electricity demand, to 7% of overall electricity demand in the US by 2030. So, given this material increase in energy demand, what infrastructure sectors do we expect to benefit? Certainly, data center operators are a clear beneficiary, but also energy providers in general, as we anticipate an all of the above approach to meeting this increase in demand.

Midstream companies, especially those focused on the transportation of liquid natural gas, we expect to be beneficiaries because there will be increased demand. Utilities, globally, we expect to benefit. We expect the grid operators which need to invest more to shore up their grid to meet increasing demand, we expect they will be beneficiaries, but we also believe utilities and contracted power companies with renewable development businesses to also benefit from this trend. In the case of renewables, it's important to highlight that big tech companies, who are the largest developers of data centers today, remain committed to decarbonization and are focused on powering those assets with renewable energy.

So, in closing, against the backdrop of slowing economic growth, a more dovish Fed, and expectations for declining interest rates in major markets globally, we think infrastructure is well positioned, and in our view, is set up for a sustained multi-year run of positive performance.

David Leggette:

In terms of portfolio positioning, MEGI's portfolio holds 64 positions across common equity, which is 88% of the portfolio, and 12% of the portfolio is invested in equity preferred shares. With respect to that mix of 88/12, common equity, preferred equity, we've recently reduced our exposure to preferreds in favor of common equity. It's based on our view that as the infrastructure market continues to recover, we expect the common equity exposure to provide greater potential upside than the preferreds.

On a regional basis, 51% of our portfolio is invested in America's, 31% in Europe, 18% is invested in the Asia Pacific market. From a sector exposure, it's important to note that roughly two-thirds of MEGI's portfolio today is positioned to benefit from the emerging secular demand trend I discussed, which is this increase in energy demand. We've got 62% of the portfolio invested in utilities and contracted power companies. We have another 8% invested in midstream energy companies. And 15% in communications infrastructure, which includes data centers.

David Leggette:

MEGI is well-suited for income-focused allocations and investors. We think it's a strong complement to allocations to other real assets, which may include listed real estate, or private equity real estate and infrastructure. Historically, fixed income has been a common funding source for an allocation to infrastructure, but we've seen that change as fixed income yields have been more attractive, and so more recently, given the attractive valuations of infrastructure relative to broad equities, we're increasingly seeing our clients fund allocations to infrastructure from a broad equity exposures within their portfolios.

David Leggette:

Appreciate the opportunity. Thank you.