Time for an Infrastructure Allocation in Your Portfolio?

The need to maintain, replace and expand infrastructure is a costly global issue. According to www.infrastructureinv.com, infrastructure is a market where $25 trillion of capital will be invested over the next decade. A few months ago Obama assembled an $850 billion infrastructure spending plan and it is the biggest government infrastructure investment in the US since the interstate highway system was launched in the 1950s. With a similar amount being pledged by the Chinese and other governments around the word, it seems like the infrastructure boom has arrived and investors are ready to take full advantage of this revolution.

Mohamed El-Erian, CEO of PIMCO, one of the largest investment management companies in the world, suggested the following asset allocation for average investors in his new book, When Markets Collide:

• 50% Equity
• 14% bonds
• 27% Real Assets such as real estate (6%), commodities (11%), inflation protected bonds (5%) and infrastructure (5%)

The rest should be in other special opportunities.

In other words, he believed investors should reduce their bond exposure and move to real assets such as infrastructure. Bonds face headwinds in maintaining their current role in investment portfolio due to higher inflationary pressures and portfolio adjustments among sovereign wealth funds (SWFs) that serve to reduce their relative holdings of fixed-income instruments.

Companies involved in the infrastructure sector are generally within the following industry segments:

• Airport / Highways / Railroad / Ports / Bridges / Tunnels
• Utilities: Electric, Gas, Water, Alternative, etc
• Transmission systems / Distribution systems
• Oil & Gas Storage & Transportation
• Construction & Engineering , Heavy Electrical Equipment
• Education facilities / Healthcare properties
• Communications towers / Cable networks

Currently there are 3 infrastructure ETFs on the market:

1. iShares S&P Global Infrastructure Index (IGF)

With net assets of $201 million, it is the biggest infrastructure ETF and has a very balanced sector weighting: Utilities 38% and Business Services 34%. Its yield is 3.82% .

2. SPDR FTSE/Macquarie Global Infra 100 (GII)

A distant 2^nd , with market cap of $56.7 million. It concentrates on one sector only:

Utilities accounts for more than 82% of its holdings.

3. PowerShares Emerg Mks Infrastructure (PXR)

The smallest sector ETF with a market cap of $10.9 million. It is dominated by the Industrial Materials sector, with 69% of of its weighting there.

Below are the top holding companies within these 3 ETFs:

ETF	Company	Symbol	Market Cap
IGF	TransCanada Corporation	TRP	$15.2B
IGF	Spectra Energy Corp	SE	$9.4B
IGF	Enbridge Inc	ENB	$11B
GII	EXELON CORPORATION	EXC	$31.4B
GII	FPL Group, Inc	FPL	$21.4B
GII	Southern Company	SO	$24.0B
PXR	ABB Ltd	ABB	$34.2B
PXR	Caterpillar Inc	CAT	$19.5B
PXR	Ingersoll-Rand Co. Ltd	IR	$5.3B

Source: Source: Yahoo Finance as of 04/10/09.

Over the last 2 years, there was virtually no difference between SPDRs (SPY) and GII in terms of performance. IGF did even worse than SPY. If you compare performance since the date Obama announced his $850 billion plan on December 18, 2008, SPY has outperformed both GII and IGF by about 10%.

Disclosure: I have long position in TRP and SPY.

Comments

[Alan Young:]

You've done your homework--good so far. But now that we know that these ETF's don't really deliver any performance benefit, it's time to look elsewhere.

Apr 14 02:01 AM

[dsrtwriter:]

SPY has outperformed the infrastructure ETFs to date,because the value rise of infrastructure is probably lagging two or three years.The Obama announcement is less significant in terms of timing than the time frame for a general worldwide recovery, which will stress current infrastructure levels and stimulate new spending.

In fact the fault of the Obama approach is that he puts the cart before the horse. During the good times, government failed to spend on infrastructure and squandered high tax revenues on failed social spending.Now that times are tough, it proposes to massively increase the national debt to spend on infrastructure, rather than address the factors which would provide a more sustainable stimulus to private development, such as tax cuts and moderation in extreme tariff concepts such as cap and trade.

Bottom line: build the economy back up by reducing the financial imprint of government, cut taxes on business, reduce the U.S. corporate income tax, and then when the economy recovers, infrastructure spending can blossom.

This is not what the U.S. will do, but I believe it is what most of the world will do in a couple of years. So you can look for an outperformance of infrastructure, just not yet. And the way I would play it would likely not be the ETFs but specific holding companies.

Apr 14 06:48 PM

[Javaharv:]

Everyone is an expert on the economy. What is missed is that government spending falls generally into two categories - expense and investment. Like all good investors making an investment produces returns. The government can invest and expect a return. As much as we may or may not need weapons or all sorts they do not produce a return. Infrastructure, education and to some extent health care produces returns. And no matter how the government invests money in can help the economy. It distributes the wealth and after the last 15 years of the wealthy gaining and the lower income population did not gain. How can one justify the outrageous income disparity in this country. The economy is ready to get a bit more fair. The labor movement built this economy and the great middle class. The time has come for the pendulum to swing back some.

Apr 26 12:59 PM

[Stock Jockey:]

Javaharv: Congratulations - you have won my UMEAW Award. Socialism hasn't worked anywhere in Europe or anywhere else in the world - ever. So while you may feel good with your ranting, it has little to do with economic reality.

Jun 19 06:00 PM