Quality in action: the importance of specialist investment in listed infrastructure

The importance of investing in quality companies is a longstanding, core principle for fundamental investors. Identifying quality companies with resilient business models, strong financial foundations and competitive market positions, capable of withstanding downturns and quickly returning to growth in upturns is highly desirable from an investment perspective. This is no truer than at the start of 2026, where markets remain volatile against a backdrop of escalating geopolitical risks and question marks on the durability of the 2025 global share market rally, with its underlying AI thematic.

Investors in quality infrastructure seek the key benefits of portfolio diversification, stable cash flows, a degree of inflation protection and real earnings growth over time. These benefits are powerful drivers of portfolio returns over the long term. Identifying quality infrastructure companies requires specialist understanding of the sector. In our view, it is when the infrastructure universe is tightly defined and a disciplined process is applied to investing in these assets, that these quality attributes can be best accessed. Without this specialist focus, investors may overlook quality opportunities and allocate capital to assets that appear to be infrastructure but ultimately behave very differently from an investor’s expectations.

The quality opportunity in listed infrastructure starts with definition

Infrastructure cuts across multiple diverse sub-sectors. For example, the table shows the nine key sub-sectors of the MFG Core Infrastructure strategy.
 

 

With such a broad opportunity set, what is considered infrastructure varies significantly between specialist investors and other market participants. Index to index and manager to manager, the listed infrastructure universe can be quite different. For example, consider two major listed infrastructure indices, the S&P Global Infrastructure Index (“S&P Index”) and the FTSE Core 50/50 Developed Index (“FTSE Index”). While the S&P Index captures a subset of the universe, the FTSE Index is a more broad-based construction. Comparing the sector breakdown for these two indices illustrates that infrastructure, even as it is captured at an index level, can be variable. This reflects the diverse businesses that fall under the infrastructure umbrella. There are notable differences in composition between these two major indices across commodity-price exposed and competition-exposed infrastructure companies as well as across airports, toll roads and rail.

Major index weights in infrastructure subsectors

Source: FTSE, S&P, Magellan analysis

 

These examples illustrate the broad and diverse nature of the infrastructure universe, with nearly 25% of the S&P and FTSE index weights not overlapping and each index exhibiting a distinct composition. As a result, a wide range of very different businesses, with distinct investment characteristics, are classified as ‘infrastructure’. This is important because, ultimately, how listed infrastructure is defined can have a significant impact on the risk/return characteristics of an infrastructure investment. This suggests that a generalist view of infrastructure risks oversimplification and may not unpack the specific risks and opportunities in each subsector that drive long-term returns.

Comparing the breakdown of the MFG Core Infrastructure strategy with the S&P Index highlights the differences between specialist and generalist definitions of infrastructure.

We note that there is concentration in the infrastructure benchmark in commodity-price-exposed companies, such as oil and gas pipeline companies (where a substantial proportion of their earnings is tied to commodity prices), and in those companies with undue exposure to competition, such as merchant generators. We also note exposure to businesses operating in higher-risk sovereignties, such as non- OECD jurisdictions, including China. At the same time, the S&P Index has almost no exposure to some fundamental infrastructure sectors including Gas and Water. In contrast, the MFG Core Infrastructure strategy screens out businesses with undue exposure to commodity prices, competition and sovereign risk. Instead, the strategy focuses on investing in ‘core’ infrastructure businesses, including integrated power, transmission and distribution, toll roads and communications infrastructure, to generate durable returns.

MFG Core Infrastructure Strategy weighs in key infrastructure sub sectors compared to index weights

Source: S&P, Magellan analysis

 

The strategy and index weights comparison chart exemplifies a specialist view of infrastructure in action. A disciplined definition frames the investment universe from the outset and provides a differentiated opportunity set. This matters to investors because it leads to meaningful differences in how companies perform through economic cycles and in the expected durability of their returns. As highlighted on the right, defining the infrastructure universe tightly is a critical first step in identifying reliable, quality infrastructure companies.

A specialist approach goes deeper on quality listed infrastructure

In refining the scope of acceptable listed infrastructure companies, a clear definition is the foundation for investing in quality businesses in this asset class. Having a well-defined potential set of companies on which to focus sets the stage for a disciplined investment process to follow.

In our view, quality is then driven by the underlying asset economics of an infrastructure business, as these characteristics determine a company’s ability to weather tough conditions and thrive when the economic cycle turns up. This is at the centre of a specialist approach to infrastructure investing, as it requires a deep understanding of the economic models across the key subsectors, along with detailed knowledge of specific companies within a given group.

Consider a sample of companies from the S&P Index, in which the Index has a 0% weight, however are among the largest holdings in the MFG Core Infrastructure strategy. These companies demonstrate high-quality attributes, as shown in the case studies on the following pages. They are also significant contributors to total return for the MFG Core Infrastructure strategy in recent years. Investing in these companies, or in strategies that hold them, has therefore presented a quality opportunity for investors that may have otherwise been overlooked by simply following an index.

The Magellan Infrastructure Definition

Our definition focuses on two core characteristics of true infrastructure assets, which support their distinct performance through economic cycles:

Highly reliable demand

Highly reliable cash flows

For many investment managers, screening companies on the reliability of their demand is a key step, but not the only step in defining an ‘infrastructure’ company. For example, companies that provide essential services to the community such as water and electricity infrastructure companies are widely regarded as infrastructure.

We view the reliability of cash flows as an equally crucial second step in evaluating companies for their suitability. This includes screening companies for undue exposure to commodity prices, competitive pressures and undue sovereign risk.

Looking at electricity infrastructure, we consider regulated utilities that provide an essential service and generate predictable cash flows to be infrastructure. These businesses typically operate in a monopoly-like structure and earn an agreed regulated return on their assets. Companies such as Xcel Energy or WEC Energy in the US and the water utility Severn Trent in the UK are examples. However, we do not consider merchant generators or ‘gentailers’ (companies that combine generation and retail, such as AGL and Origin in Australia) as meeting our definition of infrastructure. Though these businesses provide electricity, which is an essential service with predictable demand, they are beholden to market price pressures in competitive retail markets. This is an important point of difference, as it speaks to a company’s ability to act in a differentiated, dependable way through a business cycle; for example, by continuing to grow margins, collect cash and provide yield to investors.

Ferrovial

Flagship concession assets in high-density markets: Ferrovial is a multinational infrastructure company with core operations in toll roads and airports, alongside construction and services businesses. Within its infrastructure division, North American toll roads are the most significant contributor, highlighted by its flagship investment in Toronto’s 407 ETR and its managed lanes network across the United States. The company also has a presence in airports, with investments in major global hub JFK in New York.

Exemplary pricing power: The 407 ETR in Canada is arguably one of the most attractive toll road concessions in the market, with Ferrovial holding a 48.29% stake. In recent years, the company implemented mid-teens toll increases. Market conditions and the positioning of the asset provide for such robust pricing power. The road runs across northern Toronto, with Highway 401 as the main alternative route. The 401 is often regarded as the busiest highway in North America and experiences significant congestion. In addition, the 407 ETR operates under a long-term contract that extends to 2098 and toll price increases have few restrictions – with no specific cap on toll prices as long as traffic remains above specified levels. The pricing flexibility is key and stands in contrast to many toll roads that have more restrictive pricing clauses embedded in their contracts. We believe traffic conditions should remain favourable, supported by positive migration trends, a solid economic outlook, and the road’s role as a key corridor across densely populated areas of Toronto. Lake Ontario to the south limits the development of effective competing routes.

Ownership stakes in additional assets with good operating leverage: The company has been growing its business throughout the US by developing its high-occupancy toll lanes (‘HOT’ lanes) or managed lanes. The distinguishing feature of these HOT lanes is their use of dynamic pricing. This means that to guarantee and maintain a minimum average speed, the tolls are automatically adjusted higher as the speed of vehicles drops towards the minimum threshold. Users are charged based on their marginal willingness to pay, rather than a cap set by the concession grantor. While this can lead to high tolls at certain periods, some feedback suggests customer satisfaction is higher when tolls are higher, as it means the competing free road is heavily congested and therefore the time savings are even greater. The company operates a portfolio of managed lanes, including key assets in the fast-growing region of Dallas-Fort Worth, Texas, Charlotte, North Carolina and in a highly congested yet affluent area of Virginia that serves traffic heading to Washington D.C. We believe that the success of Ferrovial’s HOT lanes and its innovative, world-leading dynamic pricing model demonstrates the company’s strong IP and competitive advantage.

Cellnex

Cellnex is the largest tower company in Europe, owning or managing approximately 111,000 towers, largely across five core markets: Spain, Italy, France, the United Kingdom and Poland.

Predictable demand and earnings built into the business model: Cellnex’s business model involves leasing space on their towers to mobile network operators (‘telcos’) to support antenna equipment. Access to power, fibre and the structural integrity of the tower is mission-critical to our community’s everyday mobile connectivity needs. Cellnex’s existing revenues are mostly long-term, contracted and predictable in nature. Existing ‘anchor’ tenants are generally locked into 15- to 20-year take-or-pay leases, with rents escalating annually at CPI or a fixed rate of 1-2%.

Monopoly-like characteristics support revenue growth over time: Cellnex has a lot of bargaining power with customers as it can be complex and capital-intensive to change tower providers without degrading network quality. Furthermore, Cellnex renegotiates anchor leases with customers on an ‘all-or-nothing’ basis, meaning telcos must decide between renewing all antennas or moving every single antenna to another tower. Given Cellnex has a significant proportion of the towers in each of its markets, moving to another tower provider would be exceptionally difficult. Cellnex can also benefit from other telcos wanting to improve their network coverage or densify their network, as they may lease space on existing towers to new tenants. This is highly profitable for Cellnex, as the cost of maintaining these simple structures does not increase significantly, meaning the majority of new revenue falls to the bottom line.

Strong competitive position to face market consolidation: We believe Cellnex has the scale and diversification to mitigate consolidation impacts. This gives the company an advantage over other players in the European market.

The company has undertaken key steps to refocus its business and rectify the balance sheet. The company has undergone a leadership transition, which now supports sustainable and growing shareholder remuneration, backed by a substantial step-up in free cash flow generation. Cellnex has already initiated a dividend policy for 2026 of €500 million plus a share buyback plan of up to €500 million. As Cellnex continues to de-lever and complete its inorganic capex obligations, we forecast these returns to grow sustainably over the medium term.

Compare this with some examples of companies that may look and feel like infrastructure, but on review of their economic models, do not appear to be high enough quality companies to meet our definition. Merchant power company Constellation Energy Corporation is one example. The MFG Core Infrastructure strategy does not hold Constellation, but it is among the largest positions in the S&P Index. Merchant power company Vistra, in which the strategy is also not invested, is another similar company, excluded from our definition and our portfolio following the same rationale.

Constellation operates as a generation/retail business, whereby it sells approximately 70% of its expected generation output to retail customers. For this segment, the company works to lock in a ‘retail margin’ on supply, including through long-term supply agreements and hedges. Constellation then aims to sell any remaining power to the wholesale market (or the company would need to buy surplus power required in the market, should there be a shortfall). This model leaves the company exposed to wholesale market prices, with approximately 30% of output sold in this market. Wholesale prices respond to supply and demand signals and exhibit significant volatility.

This in turn has historically driven significant risks to earnings quality, reflected in volatility in the company’s earnings and in its share price. In February 2021, extreme winter weather resulted in outages at some of Constellation’s generation plants in Texas. Given the harsh weather conditions, the period was characterised by very high demand and prices. To satisfy its customer supply obligations, Constellation was required to purchase power at the prevailing market price cap of around $9,000/MWh, resulting in losses of approximately US$800 million. This example highlights that the gentailer business model – which underpins merchant generation companies such as Constellation and Vistra – is inherently susceptible to hedging mismatches that risk significant periodic economic losses.

The volatility can also swing to the upside for these companies, particularly in periods of favourable competitive dynamics. For example, Constellation and Vistra recorded extraordinary stock price appreciation in 2024, as market expectations for AI, data centre expansion and rapid power demand growth accelerated. However, this then gave way to steep corrections in early 2025 on the announcement of DeepSeek AI, which represented a more efficient entrant to the AI market and shook market expectations for high power demand. The Constellation share price dropped 21% in a single session in January 2025. Elevated stock price volatility highlights the perceived leverage of merchant power companies to the AI theme and their high degree of exposure to technological, market and competitive forces.

Constellation Energy share price

Source: FactSet, Magellan analysis. Data for the two years to 09 February 2026.

 

By virtue of our strict definition of infrastructure, we do not invest in those companies with undue exposure to competition. The example above demonstrates why merchant power generation companies sit outside our investible universe, given the inherent volatility of their earnings and the resulting erratic share price performance. We expect quality infrastructure companies to generate predictable cash flows supported by dependable demand. As such, we would not view an infrastructure strategy or allocation as the place to take on such volatility.

Commodity-exposed infrastructure companies, including many oil and gas pipelines, are another example of assets that are commonly bucketed as ‘infrastructure’ but, from our perspective, indicate significant risk to earnings quality and sit outside our universe. Targa Resources, along with other commodity-price-sensitive companies such as Williams and Cheniere Energy, is commonly included in infrastructure allocations. Historically, the share price has been highly correlated with the oil price, which reflects the underlying commodity price-sensitive nature of earnings. This drives a boom-bust pattern, as shown below. The 2015-2016 period is a case in point. From mid-2014, surging US shale oil production, resilient OPEC output and weakening global demand saw benchmark crude oil prices fall precipitously, weighing on the earnings of commodity-price-sensitive companies including Targa Resources. In 2016, supply disruptions affecting key oil exporters, OPEC+ production cuts, declining US shale production and improving global oil demand drove a sharp increase in benchmark oil prices. Prices more than doubled, creating a tailwind for earnings at Targa and other commodity-price-sensitive companies in the benchmark. This pattern was repeated in 2022-2023, as geopolitical tensions and recovering demand post COVID-19 fuelled stronger commodity prices, providing a tailwind for earnings and share price performance.

Source: FactSet, Magellan analysis.

 

However, these gains typically do not last as the boom-bust cycle that has typified this sector plays out. In our view, the volatile and pro-cyclical nature of these companies makes them inappropriate for an allocation within an infrastructure portfolio. Our quality focus actively screens out such pro-cyclical exposure, which is inconsistent with our guiding definition, looking for consistency in earnings over time.

These brief examples highlight that having a deep understanding of the economic models and businesses across the infrastructure universe provides for a disciplined approach to assessing quality and asset selection.

Definition and quality are instrumental to how infrastructure performs

Investing in quality listed infrastructure, supported by a disciplined definition, we believe aims to improve the reliability and durability of investor returns and enhance the diversification benefits achieved through an allocation to the asset class. The review of competition and commodity-price-exposed companies above is a reminder that not every opportunity that looks like infrastructure can deliver the defensive, stable characteristics investors are seeking.

As discussed above, high-quality infrastructure companies behave in a distinctive way, reflecting the strength of the businesses. This is evident in portfolio performance when comparing a tightly defined portfolio of quality companies with a broader infrastructure index. As shown in the annual returns table for the MFG Core Infrastructure strategy, the performance record is one of consistent, moderate-paced returns.

This contrasts with the more pronounced year-to-year upswings and downdrafts observed in portfolios that include lower-quality, less-defensive infrastructure companies outside our definition.

While there may be periods in which lower-quality companies outperform, over a full cycle we aim to achieve similar or better returns over time.

Annual returns for the MFG Core Infrastructure Strategy and key indices

Source: Magellan, OECD, Data to 31 December 2025. Returns in USD. *S&P Global Infrastructure Index Net Total Return spliced with UBS Developed Infrastructure and Utilities Net Total Return Index prior to 1 January 2015. Note: as the UBS Developed Infrastructure and Utilities Net Total Return Index ceased to be published from 31 May 2015, it was replaced by Magellan on 1 January 2015 with the S&P Global Infrastructure Index Net Total Return.

 

The steadier return profile for well-defined, quality infrastructure is reinforced in looking at downside capture. In market drawdown for the MFG Core Infrastructure strategy and key indices chart, we can see that infrastructure draws down significantly less than broader equities. This exemplifies the diversification characteristics that attract many investors to the asset class. Importantly, the MFG Core Infrastructure strategy, as a specialist strategy focused on high-quality companies, has experienced significantly less drawdown than broader infrastructure indices.

As a result, we can see that a portfolio focused on quality companies behaves differently from the broader infrastructure universe. Over the period observed, it has delivered more dependable returns and demonstrated lower cyclicality relative to the broader benchmark.

This matters because steady returns may turn into greater accumulation of capital over the long term by virtue of compounding. A portfolio that declines less in weaker markets is better positioned to resume building gains when conditions improve. The chart below makes this clear, with the slow and steady approach of investing in high-quality companies ultimately outperforming more volatile investments with higher compound returns over time.

Drawdown for the MFG Core Infrastructure Strategy and key indices

 

Source Magellan, Bloomberg. Equity market drawdowns are defined as events where the MSCI World NTR Index has declined by 5% or more. The numerical information above is based on the net returns of a representative portfolio which has the highest fee charged to any client in this composite. The representative portfolio is an account in the Global Core Infrastructure Composite that closely reflects the portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio may differ from those of the composite and of the other accounts in the composite.

The MFG Core Infrastructure Strategy aims to generate robust compound returns over time

 

A specialist approach supports solid long-term returns

For investors seeking more stable long-term return characteristics, a quality-driven investment philosophy and process we believe aims to identify companies with resilient business models and sustainable earnings. A specialist approach – underpinned by a disciplined definition of quality – focuses on listed infrastructure companies that we believe are better positioned to deliver dependable growth over time.

Historically, portfolios constructed in this way have exhibited differentiated performance characteristics, including lower cyclicality and improved diversification relative to broader infrastructure benchmarks. This approach focuses on generating real returns over time through investment in high-quality infrastructure companies, characterised by consistent demand, disciplined operations and resilient earnings.

Over the long term, such assets have historically delivered mid-single-digit earnings growth, with returns broadly in line with OECD G7 CPI+5%^, although outcomes will vary depending on market conditions. In our view, this approach reflects the distinct and complementary role that quality listed infrastructure can play within a diversified portfolio.

By Magellan Global Listed Infrastructure Investment Team