Over the past few weeks, the likelihood of a “Democratic clean sweep” in November has become more and more likely, meaning bad news for markets.
In particular, bad news for the sectors that benefitted from US president Donald Trump’s 2017 corporate tax cut.
At the start of his tenure, Trump enacted the 2017 Tax Cuts and Jobs Act, cutting corporate tax from 35 per cent to 21 per cent. This tax cut has been widely credited as offering a boost for the S&P 500 over the following years, especially for the private healthcare, oil & gas and technology sectors.
But Democratic candidate Joe Biden has publicly declared his plans to roll back on this tax break, raising it to 28 per cent.
Combined with the likelihood of the Democrats gaining a Congress majority – meaning their policy changes can be more easily pushed through – the reality of this tax hike has become a growing concern for financial markets.
But not for manager Jim Wright, who runs the £41.2m LF Miton Global Infrastructure Income fund.
Wright said that if this tax hike does come to pass he has already invested the fund into two trends that won’t feel the brunt of a tax hike: US regulated utilities and renewables.
Based on the fact that he expects a “Democratic clean sweep”, Wright has built a ‘Biden basket’ into his fund, or a collection of companies that will benefit from the policy changes he expects from a Democratic tenure but will continue to be strong if Trump wins.
Because of the tax structure in regulated utilities, when Trump rolled out the 14 per cent tax cut this sector didn’t receive a cut, nor share in the growth it catalysed, and consequently underperformed compared to the rallying S&P 500, Wright explained.
“It was probably the only sector to some extent who did not see the benefit in the tax cuts,” he said.
Performance of indices since corporate tax cut
Source: FE Analytics
But the fact that it wasn’t positively impacted in the first place suggests that the sector won’t be negatively impacted if it’s reversed.
“So this time around, the inverse of that is potentially regulated utilities simply driven by this tax change could be significant outperformers,” Wright said.
But a potential tax change isn’t the only reason that Wright has focused his fund in regulated utilities. It is also a sector set to benefit from the Democrats ‘green policies’ and the push renewable energy would receive.
One thing which has been made clear in the Democrat’s lobbying campaign is that policies tackling climate change are taking a front and centre position.
“A very, very high priority and it plays very well into the Democrat base but does very well to [attract] the millennial voters, who tend to be more Democrat then Republican in the US,” Wright (pictured) said.
Targets such as net-zero emissions from power generators by 2040 and building a cleaner transportation sector are just some of the aggressive targets the Democrats have laid out.
A wider move into renewable energy sources is not just effective for the planet but is a cost-effective energy supply, going hand-in-hand with regulated utilities because ultimately a drive in the transition to wind or solar energy sources will be reflected in the national power supplies.
The manager said this shows a “massive economic imperative for this energy transition” because it suggests the cost of renewables will continue to get “cheaper, and cheaper, and cheaper”.
Wright cited research by US energy company NextEra Energy, which forecasted that wind and solar energy will be “cheaper than the cheapest form of fossil fuel generation” within the next two or three years. 
As stated above, Biden is expected to make big policy decisions towards tackling climate change, meaning that the renewable energy sector will be a major benefactor of that.
Wright said that in order to push through the transition to renewables from fossil fuels he expects to see Biden using a “carrot and stick approach”, with tax incentives for renewable energy development and potential penalties for higher emissions.
Looking for opportunities in the companies already immersed in these two themes, Wright has set up his LF Miton Global Infrastructure Income fund for the November election results by having over 25 per cent of the fund in 10 US stocks, all with direct exposure to renewables and US regulated utilities, making up part of his ‘Biden basket’.
This ‘Biden basket’ includes companies such as NextEra Energy Partners, Xcel Energy, American Electric Power and WEC Energy.
Alongside this direct investment from the US, LF Miton Global Infrastructure Income has an international exposure to these themes. Companies that are not US listed but have very significant assets in the US such as Orsted from Denmark – the funds second biggest holding – and UK’s National Grid are among these.
“To summarise the election is upcoming and markets are going to have to start thinking about them,” Wright said.
“If we see a Democratic landslide what we know is that Democratic administrations are often not great for markets, [but] that’s not always the case certainly. It’s not great for the traditional sectors like oil & gas, private healthcare, potentially even big tech. Eventually they may even start trying to regulate big tech.
“A lot of sectors will be questioned if we have this Democratic landslide, but we believe regulated utilities and renewables are a little bit different and provides some positive upside. And don’t forget that relative tax position as well. The fact is that these stocks will not be negatively impacted by rises in corporate tax.”
Wright added: “Even if the status quo is maintained, we think that these stocks can continue to perform well as they have across the last two or three years. And we have a very significant weight in this fund to these areas.
“So overall, we think that with the ‘Biden basket’ when thinking about building [one] in your portfolio you should definitely think about including some exposure to US regulated utilities and renewable generation stocks.”
Over the past three years, Wright’s LF Miton Global Infrastructure Income fund has made a total return of 15.77 per cent, outperforming the IA Global Equity Income sector (8.93 per cent).
Performance of fund vs sector over 3 yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 1 per cent and has a yield of 3.75 per cent.