At Reaves, our strategies are unapologetically defensive. We focus on essential infrastructure companies because we believe their role - to enable the functionality of our modern economy - makes them some of the most durable business models investors can find.
But durable doesn’t mean boring. The industries in which we invest are tied to some of the strongest secular growth trends that, we believe, should support growth in both earnings and distributions for years to come. In our view, their role in providing the infrastructure that enables these trends makes them some of the most defensive ways to invest in these growth themes.
This blog will highlight five of these secular growth trends and the essential infrastructure investments behind them that are represented in our Long Term Value Strategy1. Those trends include:
- The growing reliance on broadband (view previous blog on this topic). Over a year into the pandemic many employees continue to work from home, students are still attending school from home and families are still relying on sourcing entertainment at home, as we all still generally live more of our lives at home. This dynamic continues to highlight how essential existing broadband networks have become, how strong existing broadband networks are and how moated the companies that deliver them are.
At Reaves, we believe the pandemic has only highlighted the necessity and durability of the broadband business model and its ability to generate steady growth in earnings and cash flow. We believe the networks built by cable companies remain a far superior and more reliable network option than competitors can provide.
- The renewable energy transition (view previous blog on this topic). Utilities are in the early stages of a massive spending cycle to make the energy grid greener. Support for this effort is coming from not just environmentalists, but regulators, politicians, customers, and shareholders alike. Rapidly declining costs to generate electricity from renewable sources, such as wind and solar, is minimizing upward pressure on customer rates, which in turn, supports the likelihood of regulatory approval for more new projects. This increase in invested capital provides a direct opportunity to drive earnings power and, ultimately, distribution growth. At Reaves, we believe this trend is only in its infancy as renewable power accounted for a mere 20% of U.S. electricity generation in 20202.
- The rollout of 5G (view previous blog on this topic). As governments around the world continue to reallocate ever more wireless spectrum for wireless carriers to enable 5G and satisfy insatiable consumer demand for data, cellular tower companies stand to benefit. We believe the most efficient way for carriers to deploy that spectrum to its highest and best use is to rent space on wireless towers and hang two-way radio equipment. In addition to this growth trend, uncommonly low technology risk, prohibitive zoning, and extraordinarily high switching costs support the durability of cellular tower earnings. At Reaves, we take the perspective that the business model resulting from these dynamics is as good as any in the global economy.
- The adoption of cloud computing. The adoption of cloud computing solutions has and continues to support the growth in data consumption and storage for individuals and enterprises alike. Data centers are essentially the landlords to cloud computing. These facilities are network-dense and provide businesses large and small with an on-ramp to the cloud, where applications can be run, and modern business transactions can be executed. These facilities also enjoy powerful “network” effects and high switching costs. As the facility accumulates hundreds of cloud, telecom, and enterprise customers, it becomes economically unthinkable for businesses to reject the low-cost, mission critical nature of the co-location model. At Reaves, we believe this dynamic may support durable earnings growth for years to come.
- The rise of e-commerce (view previous blog on this topic). The proliferation of e-commerce retailing, which has further accelerated since the onset of the global pandemic, is a trend creating a major tailwind for industrial REITs3 who own and operator e-commerce distribution facilities. Modern e-commerce facilities are usually located near major cities, often within a few hours’ drive from the end consumers. These locations, given limited land availability, zoning challenges, and alternative uses that command higher rents per square foot create scarcity value which e-retailers are willing to pay a premium for. At Reaves, we believe scarcity enabled pricing power coupled with growing e-commerce demand may offer investors durable earnings and distribution growth.
As each of these trends highlight, essential service infrastructure companies aren’t missing out on exciting growth … they are enabling it.
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.
The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.
1 Beginning December 2019, Reaves LTV Strategy is represented by the LTV SMA Wrap Composite. This composite contains those LTV discretionary portfolios with wrap (bundled) fees. Wrap accounts are charged a bundled fee which includes the wrap sponsor fee, as well as, Reaves’ investment advisory fee. Due to compliance requirements, the net-of-fees calculation is computed based on the highest annual fee assigned by any wrap sponsor who utilizes this portfolio in an investment wrap program (300 basis points from 1/1/03 through 12/31/16 and, effective 1/1/2017, 250 basis points). The LTV SMA Wrap Composite performance consists of money-weighted, time-weighted returns and it includes the reinvestment of all dividends and other earnings. The inception date of the composite is December 2002; however, the composite was created in January 2013. This composite has been managed in a similar manner to the LTV ERISA Composite which ended in December of 2019. The LTV SMA Wrap Composite does not represent all of Reaves’ assets under management.
2 Link to source: https://www.eei.org/resourcesandmedia/Documents/pie_natresourcemix.pdf Renewable power includes wind, hydro, and other renewables (as shown in the pie chart).
3 A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.
All investments involve risk, including loss of principal.
All data is presented in U.S. dollars.
Cash is cash and cash equivalents.
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