The folks at EG Shares, the emerging market sector ETF people, sent me a report this week about infrastructure investing. It looks like the report is on their website, but when I clicked on it it leads to another report. I'm not sure if the report is publicly available so I don't think I can post much in the way of detail, but it is probably ok to put my own spin on a rhetorical-ish question that the reports asks.
EG Shares has filed for an infrastructure fund. I have no idea what will be in the fund but it makes sense that a company that will presumably be listing an infrastructure product to do a write up that explores the space. One question they ask is whether or not infrastructure is a distinct asset class that offers low volatility and a low correlation to equities.
Of course the answer is "it depends." I think it is difficult to make the case that a stock like ABB (ABB) is from a distinct asset class. It is an industrial stock that is clearly part of the infrastructure solution but how does what it does make it a completely different asset class? If you look under the hood of most of the infrastructure ETFs you will see a mix of different companies including industrial stocks and utilities. (Click chart to enlarge)
If there is a case to be made for distinct asset class then it is probably with things like pipelines, toll roads, airports and sea ports and there are stocks in these areas to invest in. The type of usage that these provide generates a different type of revenue than widget makers, to be sure. It may be less different than certain types of fee revenue industries like financial companies, but is still kind of different. As a side note, the report makes a brief case for a certain segment of the financial industry as being part of the infrastructure theme. A while back I made an argument for publicly traded exchanges being part of the theme but EG Shares did not go down that road in their report.
The chart above compares Abertis (ABFOF.PK), which is a toll road operator in Europe (blue line), Beijing Airport (red line), Port of Tauranga from New Zealand (green line) and the S&P 500 (yellow line).
Over five years how different do you think any of them are from the broader market? To the eye, Abertis looks like it has the tightest correlation to the S&P 500. Port of Tauranga starts out looking like the US market, but then it held up much better during the downturn though certainly was not immune. Beijing Airport looks like a lot of emerging market stocks. It wildly outperformed EEM (not charted) in the bull market, then fell a lot more than EEM during the bear market and has rebounded about the same since the March low.
Like many things, the evidence is mixed. If we look at all of the stocks in these groups (I tried to pick names that were from different parts of the world) we would probably get some that look like Port of Tauranga and some others that look like Beijing Airport. The NZ 50, the benchmark index from New Zealand, held up much better than the S&P 500 as well so should Port of Tauranga's result be attributed to country and not theme? Auckland Airport (AIA.NZ) did not hold up as well as the NZ 50 which in turn did not hold up as well as Port of Tauranga, but Auckland Airport did hold up better than the S&P 500.
This casual peek at New Zealand and a couple of related stocks from that country obviously does not provide anything conclusive about country being more important than theme but it does raise the question. I've mentioned having a couple of infrastructure ETFs in my ownership universe but I do not view them as being from a different asset class. I use them as part of my industrial sector allocation. I've isolated a couple of infrastructure stocks in addition to Port of Tauranga that I believe have a relatively low correlation to US stocks even during the decline so there are some individual names that can create the effect of different asset class. Mixing a bunch of stocks together under the hood of an ETF might make it more difficult to successfully create a different asset class.
Let me reiterate that the ETFs are viable ways to capture the space (that I think this should be obvious as I use them) but I don't think of them as some sort of low volume, low correlation unique asset class.
