Digging Deeper Into Infrastructure (Part 1)

Many consider global “infrastructure" an investment opportunity. The developing markets continue their growth despite a slowdown, and the US has deteriorating systems in need of replacement. With China and US each announcing intentions to spend hundreds of billions on infrastructure, plus many other nations chipping in, what's the best way for investors to get in on the action?

One approach is to select among the eight mutual funds and ETFs focusing on infrastructure. Each has a different approach. For my money, I would insist on a portfolio meeting two criteria: 1) their holdings must cover the range of industries that participate in infrastructure, and 2) they must participate in both the US and China build-outs, with other global markets as a bonus.

With civil projects, the government is the customer. The first tier contractors are the big construction and engineering firms that regularly work with state and federal governments. In North America and Europe, that means companies like Fluor (FLR), United Technologies (UTX), ABB (ABB), Siemens (SI), Caterpillar (CAT), Jacobs Engineering (JEC), and Veolia (VE), to name a few. Some of these blue-chips will participate in China's build-out as well, but we need to see the Asian industry leaders as well, like Taiwan Cement and China Communication Construction.

Most infrastructure funds are less than two years old. The grand-daddy of them all is US Global Megatrends (MEGAX), launched in 2004. Its holdings are primarily engineering and construction companies, with a bit of utilities and tolls mixed in. It is US-oriented with a decent representation of BRIC holdings. This fund, like several others that follow, holds income-generating structures as well as companies that do infrastructure. This approach provides stability but limits the potential for growth that we hope to see from the stimulus packages.

In 2007, three new funds were launched, just before the current economic climate reshaped the infrastructure landscape. All three have 60-70% of holdings outside of the US, yet they are all short on China holdings.

• Macquarie Global Infrastructure (GII) focuses on utilities and utility builders with 90% of its holdings in US, Europe and Japan.
• The Kensington Global Infrastructure fund (KGICX) invests in the physical structures that generate income, like transportation and communication networks, utilities and energy storage, as well as infrastructure builders.
• The iShares S&P Global Infrastructure Index Fund (IGF) has a balanced allocation of industrials, utilities and energy, spread across Europe, North America and Asia. It also has a decent yield of 3.2%.

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These funds track a common channel, and all suffered the 2008 downturn. GII held up best due to its concentration in utilities. Since November 20, they’ve been a bit slow to rebound, with the exception of KGICX which has bounced close to 20%.

These four funds are heavy in US and Europe, short in China and emerging markets, and a bit too diluted with utilities. In Part 2, I’ll look at four more funds that look to Asia and emerging markets and avoid utilities.

Disclosure: No positions

Comments

[ArtfulDodger:]

Let's hope these governments put the money where they've promised and it doesn't go to buy more votes and pay off constitutients.

Jan 12 01:18 PM