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February was a turbulent month for investors with the global equity market falling sharply before staging a brief recovery, but still ending down. With respect to the bond market, the most notable story of the month was the global sell-off, with a large rise in yield towards the back-end of the curve. Amidst this backdrop, the US dollar strengthened during the month.

Portfolio PerformanceThe largest detractors from monthly performance were the UK water stocks (Pennon, United Utilities and Severn Trent) which collectively detracted -0.95% from monthly performance. The overall weakness in this sub-sector was due to concerns over Brexit implementation and the potential nationalisation of UK water companies, a policy recommendation from the UK Labour Party. In our view, given the high costs involved, nationalisation is unlikely to occur. As such, we retain our conviction in the UK water thematic.

Elsewhere, Canadian gas company Enbridge (ENB) also detracted from monthly performance (-0.44%). The rising bond yields in the Canadian market have weighed on defensive stocks, however, we retain our conviction in ENB’s fundamentals. ENB’s core business is owning and operating one of the largest oil and gas pipeline networks in North America. The company also owns regulated gas distribution utilities in Ontario, and a fast-growing portfolio of renewable power assets in North America and Europe.

Turning to the contributors to performance, European Satellite operators, Eutelsat and SES S.A. were the largest contributors to monthly performance returning +0.25% and +0.11% respectively.

Eutelsat (ETL) is a leading European satellite operator. ETL has 39 satellites in geostationary orbit and provides broadcasting services to major satellite TV platforms, as well as communication solutions for governments, companies, and telecom operators. The share price of ETL rallied strongly post the company’s result announcement in which company management detailed their 'elite cost savings program' which continued to exceed market expectations.

SES S.A. (SES) is the world’s second-largest commercial satellite operator, with a strong presence in the US and Europe, and rapidly growing exposure to Latin America, the Middle East, Africa and central/eastern Europe. Headquartered in Luxembourg, SES owns and operates 53 geostationary satellites which cover 99% of the world’s population. Similar to ETL, SES also announced their earnings results. As the results were largely in line with market expectations, the share price experienced a 4% rise.

Australian electric utility Spark Infrastructure (SKI), also rebounded during the month, contributing +0.18% to monthly performance. SKI is an Australian company that invests in regulated energy networks. SKIowns 49% of the electric distribution networks in South Australia, central Melbourne and western Victoria. It alsohas a 15% stake in TransGrid (NSW electricity transmission) as part of a consortium. During the month,the company announced their full-year results in which cash generation was ahead of expectations. Themarket viewed these results favourably, resulting in SKI’s share price rebounding. Please see 'Monthly StockHighlight’ below for RARE’s investment thesis on this stock.

All returns are in local currency.

CommentaryFebruary 2018

RARE Infrastructure Value Strategy

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Positioning and OutlookThe Investment Committee (IC) has positioned the Strategy’s core exposure to growth-oriented utilities balanced against selective exposure to the more growth-sensitive infrastructure sectors.

On a regional level, the Portfolio’s largest exposure is in Western Europe and consists of exposure to utilities (14%) and economically sensitive sectors (26%). We expect the continued accommodative monetary policy in Europe to provide an attractive investment environment for select European utilities and to support economic growth in the medium term (solid but unexciting growth). This supports the valuations of economically sensitive securities, namely toll roads, airports and communications stocks.

For the RARE Infrastructure Value Strategy, the primary quantitative tool in portfolio construction is the Excess Return, on which RARE’s stock ranking system is based. As such, driven by valuation, the Investment Committee initiated a position in CFE Capital, a Mexican electric transmission business and Ferrovial, a global toll road and airport owner headquartered in Spain.

Monthly Stock HighlightThis month we review Spark Infrastructure (SKI), an Australian company that invests in regulated energy networks. SKI owns 49% of the electric distribution networks in South Australia, central Melbourne and western Victoria. It also has a 15% stake in TransGrid (NSW electricity transmission) as part of a consortium.

Roughly 98% of SKI’s cash flow is derived from regulated and semi-regulated activities. Australia’s incentive-based regulation has allowed SKI’s companies to significantly outperform their regulatory assumptions.

We believe that SKI offers defensive utility exposure with growth: including about 2.7% Regulated Asset Base growth and a one-year forward dividend yield of 5% that is growing above inflation.

This is supported by a fully funded capital expenditure program and an internalised management structure. We expect asset-level cash flow, which is highly transparent due to regulation, to continue growing and flow through to security holders over our investment time horizon.

Important information

While the information contained in this document has been prepared with all reasonable care, the RARE Infrastructure Group does not accept any responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This material has been prepared for investment professionals, qualified investors and investment advisors only. This material is not suitable for retail investors and RARE Infrastructure does not authorise the provision of this material to retail investors. Investors should be aware that any views expressed in this material are given as of the date of publication and such views are subject to change at any time. Where an investment product is mentioned, potential investors should seek independent advice as to the suitability of the product to their investment needs. Reference to shares in a particular company, is not a recommendation to buy, sell or hold that stock. Past performance is not indicative of future performance. Returns can be volatile, reflecting rises and falls in the value of underlying investments. Any prospective PE ratios and dividend yields or forecasts referred to in this material constitute estimates which have been calculated by the RARE Infrastructure investment team based on RARE’s investment processes and research. The distribution of this document may be restricted in your jurisdiction. This document does not constitute an offer or solicitation in any jurisdiction in which to make such an offer or solicitation would be unlawful. It is your responsibility to ensure that any such product, security, service or investment outlined is available in your jurisdiction. Issued and approved outside Canada, United States of America and EU/EEA by RARE Infrastructure Limited (“RIL”), registered office Level 13, 35 Clarence Street, Sydney, NSW 2000, Australia (ACN 84119339052; AFSL307727). In Canada and the United States of America, issued and approved by RARE Infrastructure (North America) Pty Ltd (“RINA”), registered office Level 13, 35 Clarence Street, Sydney, NSW 2000, Australia (ACN 138069191). Neither RIL nor RINA are registered as a dealer in any province in Canada. RIL and RINA are not offering the securities of any investment fund that may be described in the materials in Canada or the United States. This material has not been approved or verified by the SEC or the OSC. RARE Infrastructure operates in the EU/EEA from the UK through Legg Mason Investments (Europe) Limited, which is Authorised & Regulated by the Financial Conduct Authority, registered office 201Bishopsgate, London EC2M 3AB. Legg Mason Investments (Europe) Limited is registered in England and Wales with Company No. 7970290. This material is issued in the EU/EEA by Legg Mason Investments (Europe) Limited. RARE Infrastructure is an affiliate of Legg Mason.

Richard Elmslie Nick Langley Shane Hurst Charles Hamieh