In Infrastructure We Trust

Another popular financial website has been running over the past few months, a series of articles asking money managers for their "high conviction picks" or what would they hold, if they could own "just one stock". I'm always interested in reading about what other analysts consider their top takes on the market. Looking back through my own holdings and writing, I couldn't come up with a single high conviction pick. What I do have is a theme.

$25 Trillion Over 25 Years

Infrastructure remains a compelling long term theme. Sustainable economic growth necessitates investment in new infrastructure. As emerging nations continue to grow at breakneck speeds, their newly found higher incomes will lead to increased demand for a better quality of life. Better environmental services, high speed communication and new transportation beyond the city centers will need to be built. In developed nations, much of the infrastructure is older than 50 years; sections of London's sewer system are older than 100 years. The general dilapidated state of these vital economic assets requires major overhaul in order for developed nations to remain competitive on a global scale.

The Organization for Economic Co-operation and Development (OECD) estimates that governments around the world will need to spend $25 trillion over the next twenty five years on infrastructure improvements. That's trillion with a T. The United States alone will need to spend $2.2 trillion over the next five years on its aging bridges, roads, and water systems. Nations around the world have already begun spending serious money on infrastructure. China has pledged nearly $585 billion towards new projects. India has initiated a $500 billion spending plan through 2015. Japan vowed $129 billion and Canada nearly $12 billion. $107 billion in infrastructure expenditures will be required over the next three years in South Africa.

These are some serious dollar amounts. Despite the fact that budget cuts and austerity programs are becoming the norm, infrastructure improvements can only be ignored for so long. Bridges will eventually crumble, pipes will burst. Dwindling government budgets will open opportunities in the private sector. The City of Chicago's recent Skyway Bridge ninety-nine year operating deal with private investors for $1.8 billion, is just a taste of what's to come.

The Portfolio Plays

Infrastructure works as a portfolio addition in several ways, both in the income and accumulation sides of portfolio. The sector's low correlation with other asset classes provides diversification benefits while boosting returns and curbing risk. Cash flows from infrastructure produce stable revenues, such as payments for use of a cellular towers or highway tolls. This income is often inflation resistant as many infrastructure businesses use pricing formulas that change with economic conditions. Additionally, those companies directly involved with the build-out could see hefty capital gains as more money flows into the sector.

Adding infrastructure investment to a portfolio can be a daunting task as the breadth of the sector is so large. Wall Street has attempted to quantify the theme into several exchange traded funds. There are two that really stand out for investment. The PowerShares Emerging Markets Infrastructure (NYSE: PXR) and the iShares S&P Global Infrastructure Index (NYSE: IGF). The PowerShares fund can serve as way to play the overall build out, with portfolio weightings in heavy construction companies such as Fluor (NYSE: FLR) and a nearly 40% allocation to materials. The iShares fund serves as way to play the operators of toll roads, airports, pipelines etc with 60% of holdings in utilities, transmission and energy pipelines/storage. The PowerShares Water Resources (NYSE: PHO) can be used a proxy for the development of needed water infrastructure.

Canada's Brookfield and Australia's Macquarie Bank are two examples of the transition to private operation of infrastructure (Macquarie was one of the partners in the Chicago Skyway deal). Both have several private equity funds that invest in infrastructure assets which are opened to qualified investors. Luckily, the pair offers several publically traded options as well. Brookfield Infrastructure Partners (NYSE: BIP) owns a host of assets including timberlands, ports, transmission lines and social infrastructure (hospitals, prisons). The Brookfield Renewable Energy Fund (OTCBB: BRPFF) owns 42 hydroelectric generating stations and one wind farm throughout North America. Both Brookfield funds yield around 6%. The Macquarie Infrastructure Company (NYSE: MIC) includes investment in airport services, bulk liquid storage facilities and natural gas distribution.

My High Conviction Theme

As populations around the world increase, so will the need for new infrastructure. Emerging markets will need to spend billions in order to participate on a global level and developed markets will need to move beyond "patch and pray" to seriously compete. The proceeding just scratches the surface of the potential investment in the theme.    

 

Disclosure Statement: At the time of writing Aaron Levitt owned shares of the iShares S&P Global Infrastructure Index (NYSE: IGF) and PowerShares Water Resources (NYSE: PHO).

water investment Dear Aaron, I am a writer and univ.teacher.I have long been interested in water.Both because of my impecunious state and because of its crucial relationship to life.Can you help about where to invest or in what? Submitted by Anonymous (not verified) on Mon, 2011/07/18 - 3:11pm » reply |