Richard Kang1

More on SSGA's New Infrastructure ETF

Just after getting the notice yesterday of GII's eminent launch, I find today that there's nothing on my screen when I punch up GII. Being the sharp guy that he is, I see on Roger Nusbaum's site (randomroger.blogspot.c...) that he has seen the same. Wouldn't it be funny (I guess not "ha ha" funny over at SSGA) if PowerShares or Claymore quietly launched their infrastructure ETF right about now? No, I don't have anything at all as evidence that either of them, nor anyone else, is working on an infrastructure ETF but something like that would not surprise me at this juncture of the ETF industry's development.

New Infrastructure ETF From SSGA: A Closer Look

ZM: The search for yield still has a ways to go as long as central banks keep the trend going and rates stay relatively low. Everyone knows about Japan's ZIRP but the small spread between developed and developing country interest rates is another thing to consider. You see this global search as investors move from place to place looking for yield. Sometimes it's an opportunistic grab, but in other cases opportunities are taken away without much notice. Canadian income trusts and recent changes by the Canadian government on tax treatments of these is a good example and you have also mentioned shippers as another example. In terms of fund offerings (whether ETF or not), you see a lot of new product development with some form of dividend or value bias. WisdomTree is a good example. In fact, all the non-market cap weighted index funds (equal weighted, fundamental weighted, etc.) are all means to play this tilt ... whether designed that way or not.
I know that many of the very largest pension funds have made significant investments into infrastructure but what about the many more smaller institutions? Are their investment consultants planning or currently implementing similar shifts in allocation? It wouldn't surprise me at all, especially as many investors (including hedge funds) look globally and especially in the emerging markets.
Bottom line with pensions is that the recent few years of good returns hasn't been strong enough to offset the simultaneous and more significant increase on the liability side of their balance sheet. Modern processes such as "liability driven investing" will drive further interest into areas like infrastructure for these types of extreme scale portfolios.
Will all this lead to some sort of overdone condition for value stocks and sectors such as infrastructure. Of course that's possible but this "ebb and flow" sine curve is part of the game. That's not for me or one person to comment on but for the market to comment on with their dollars invested.

C: You're totally right with Hong Kong. I only wonder what proportion of the total fund will be invested in these 4 HK positions. I hear a lot about the major airport, nuclear power plant, highway and water projects in China and these are found in the general mass media like the Economist or CNN so you'd think that a major ETF or CEF like this would somehow participate in a big way. But when you think about it, likely it's the private investment that is more effective in China since it's probably the best way to get in considering the various hurdles (corruption) related.

VS: Good comments but I'll focus on the fact that you've mentioned energy twice in your comment. Yes, further to my comments on significant product development in the ETF space related to the commodity complex, including both traditional and alternative energy, this could be another play especially if energy infrastructure (including utility companies) comprise a significant proportion of the fund. You have to wonder if the rules of diversification have to be thrown out the window in today's environment. You want to participate in energy and the commodity sectors if you believe more in Jim Rogers versus his naysayers. You want to have exposures to emerging markets because of the strong demographic story, higher overall growth numbers and beyond. You want to get into infrastructure for reasons I've posted above. But all are so highly correlated and probably correlated more than you think with what you already have in your portfolio. There is the school of thought that is very anti-diversification and most (rather all) hedge funds should be thinking this way if they are mandated to be beta-neutral. In other words, they don't build portfolios based on Markowitz MPT. Thus, they do NOT add investments based on their low correlation to other positions in the portfolio. The question is how many investors are thinking opportunistically in this manner? And if we're talking about significant numbers, will this create greater volatility on the upside as well as when the market eventually goes down? VIX is still cheap at just over 11.