Here's a novel source for investment ideas: Look at what Russian thieves are stealing.
According to Reuters, Russia has seen an upsurge in thefts of cement mixers, dump trucks, and cranes in response to a boom in construction and infrastructure spending. One thief stole an asphalt paver in broad daylight.
That's not the only sign that infrastructure spending around the world is booming. Developed nations are scrambling to rebuild decaying roads and bridges, while developing nations are putting in infrastructure for the first time. Morgan Stanley (NYSE:MS) raised $4 billion earlier this month for a private-equity infrastructure fund. With the potential diversification that investing in infrastructure offers, a handful of ETFs have emerged in the field. However, these funds have some important differences, so it pays to look at them carefully before investing.
Understanding infrastructure
The infrastructure upgrades you see around the world today typically involve transportation networks, energy pipelines, water supply systems, communications networks, and sewers and wastewater treatment systems. Infrastructure ETFs come in two flavors: those that are diversified across a broad range of companies and sectors, and those that focus on a specific area, such as a water or Internet infrastructure fund.
Narrowly defined infrastructure funds tend to be more volatile and riskier than more broad-based funds, as their fortunes are tied to a specific area of the economy. So for those looking to invest in a single infrastructure fund, we'll look at two broadly diversified ETFs.
The SPDR FTSE/Macquarie Global Infrastructure 100 ETF (AMEX:GII) is made up of nearly 100 companies engaged in management, ownership, and operation of infrastructure and utility assets. Top holdings include Exelon (NYSE:EXC) and National Grid (NYSE:NGG). The fund is up about 4.5% in the past year.
The iShares S&P Global Infrastructure Index (NYSE:IGF), with just 75 stocks, has a slightly narrower focus. Fund investments include global infrastructure companies from both developed markets and emerging markets, including Williams (NYSE:WMB) and El Paso Corp. (NYSE:EP). Top sectors include utilities, industrials, and energy, while a quarter of the fund’s assets are invested in the U.S. The fund is off about 5.5% since its inception last December.
A look at the industry
Since infrastructure assets are typically large in scale, they come with high initial costs. Their values can often be difficult to determine. Built to last for decades, these assets may be illiquid and require long-term commitments from the companies that build them. One need only look at the Internet for an example of an infrastructure system that most now consider critical, but was originally undervalued.
Politics can also play a significant role with infrastructure, as government intervention can reduce or alter profits and values. Because they are physical assets, infrastructure investments face risks that range from terrorism to natural disasters.
The high risks and illiquidity of infrastructure investments have an upside, however, as their necessity can result in high returns. High capital costs usually create barriers to entry, while the cash flows of assets like toll roads and bridges can provide steady income streams. There can also be diversification benefits from investing in this area, as these physical assets tend to have low correlation with listed markets. Privatization of public-use infrastructure, such as Chicago’s Skyway Toll Road, is also opening up new opportunities and potential revenue sources for companies in this sector.
Fund prospects
Both the SPDR and the iShares fund have less than $100 million in assets, making liquidity a potential concern. For funds with a global investment mandate, however, the two ETFs have relatively low fees and give investors a window to some fast-growing economies.
Both funds would be suitable for an investor looking for a single diversified infrastructure play, with the SPDR including a few more companies in its tracking index. The SPDR has also demonstrated its ability to generate positive returns in a difficult market environment, making it the one I'd prefer.
Portfolio fit?
The road ahead for infrastructure looks bright both domestically, as the U.S. rebuilds bridges and highways, and globally, as developing nations like China and India build up their transportation systems. Infrastructure investments can provide stability to a portfolio, as the underlying assets are fixed and long-term. Infrastructure will play an important part in the expanding global economy, so investors should consider making this investment area a port of call for their portfolio.
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