This article was released to members of the Cambridge Income Laboratory on Jan. 12th.
A global infrastructure/utilities equity arbitrage opportunity.
- Short: Brookfield Global Listed Infrastructure Income Fund (NYSE:INF): 10.59% yield, -6.80% discount, +2.10 z-score, 26.52% leverage, 2.33% expense ratio.
- Long: Duff&Phelps Global Utility Income (NYSE:DPG): 8.63% yield, -14.50% discount, -0.20 z-score, 27.06% leverage, 2.28% expense ratio.
Although DPG does not have the word "infrastructure" in its name, a quick look at its holdings reveals a sizable infrastructure component. In fact, DPG's website indicates that the fund has 41.6% allocated to "Oil, Gas Storage & Transportation", traditionally considered to be infrastructure, compared to 30.1% for "Domestic & Non-U.S. Electric", traditionally considered to be utilities. In fact, both funds have TransCanada (NYSE:TRP) as their top holding.
Both funds are global and are entirely in equities.
INF and DPG tracked each other closely for the early part of last year, but in the last 6 months or so we have seen a divergence.
Much of this has been due to the contraction of INF's discount from a 52-week low of -22.96% at the start of last year, to -6.70% today, and it has a z-score of +2.10. I could not find information regarding possible activist actions for tender offers, share repurchases or liquidation that could explain the narrowing discount. INF has only 24.18% institutional ownership, with the two top institutions being Morgan Stanley (6.21% of total shares) and Guggenheim Capital 3.9%), who I presume are holding the shares passively.
DPG's discount of -14.50% (z-score = -0.20) makes it slightly undervalued relative to its recent history.
On a NAV basis, INF has underperformed DPG over the past 1, 3 and 5-year periods.
(Source: Stanford Chemist with data from Morningstar)
Despite its recent narrowing of discount, INF's price total return is still significantly less than DPG's over the past 5-year period.
What kind of gains are we looking for here? If INF's current discount of -6.70% were to contract to its 52-week average of -15.08%, the short side could gain about 8 percentage points of alpha. On the other hand, if DPG's discount of -14.50% were to contract to its 52-week average of -14.18%, a further 0.3 percentage points of alpha could be available.
Interactive Brokers had shares of INF available for shorting yesterday at a 9.36% borrow fee.
[Mar. 6th, 2017 update] Thanks to INF's whopping 30% distribution cut (from $0.1167 to $0.817) we now have a timely opportunity to exit this trade. INF's discount will probably drop to about -11% today, down from -6.80% two months ago. Over the same time frame, DPG's discount has contracted slightly from -14.50% to -13.23%, while its z-score has increased from -0.20 to +0.40. Swapping from INF to DPG over the past 2 months would have saved about 4.24% (equivalent to about 7 months' worth of distributions from INF at the new rate!).
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.