Infrastructure Funds Are Intriguing, but… Managers’ approaches vary greatly and holdings can overlap with other funds

Infrastructure Funds Are Intriguing, but…

Managers’ approaches vary greatly and holdings can overlap with other funds

LISA WARD

Feb. 3, 2014 4:21 p.m. ET

When investors look at the global need for new electrical grids, bridges and roads, some see a path to big money.

In Europe and the U.S., the problem is infrastructure that is aging and needs updating or modernizing on a large scale. In Asia and South America, there is insufficient infrastructure—not enough, at least, to keep up with the robust growth those rising economies have seen in recent years.

Such demand can make infrastructure-focused mutual funds and exchange-traded funds alluring. But investors should approach these funds with care. For one thing, they can differ widely in strategy. Even those with names suggesting a global scope in their investments can vary widely in both their geographic focus and the kinds of projects they favor.

“If you have 10 different managers, you have 10 different ways of defining the universe,” says Adam Babson, a portfolio manager for Russell Global Infrastructure, one of the sector’s largest funds.

Moreover, the stocks that such funds buy may also appear in other types of mutual funds and ETFs, raising questions about whether investors need dedicated infrastructure funds.

“You may end up investing in stocks you already own,” says David Snowball, publisher of the Mutual Fund Observer website.

Mr. Snowball cites data from Morningstar Inc., for instance, showing that more than 1,700 mutual funds own American Tower Corp. AMT -2.53% , a Boston-based company that primarily operates cellphone towers.

Recent Arrivals

Many of the three dozen or so mutual funds, ETFs and exchange-traded notes with “infrastructure” in the name entered the field recently—10 in 2013 alone. As a category, the funds had assets of $10.7 billion as of Dec. 31, according to Morningstar.

But some are already exiting the niche. John Hancock Global Infrastructure closed up shop in 2012, and T. Rowe Price Group is asking shareholders of the $43 million T. Rowe Price Global Infrastructure this spring to approve the fund’s merger into T. Rowe Price Real Assets.

The T. Rowe Price infrastructure fund was intended to offer “an attractive combination of growth and yield while providing some inflation protection,” says company spokeswoman Kylie Muratore. Instead, she says, it has shown “limited inflation protection and greater volatility and market risk,” and it hasn’t caught on with investors.

Infrastructure companies could be any business related to toll roads, railroads, water plants, power and communication networks. But some funds zero in on operators rather than builders or designers of such assets. A successful seaport operator, for example, will have multiple long-term contracts that bring in a stable revenue stream, while a shipping company’s fortunes are apt to be more closely linked to the health of the overall economy.

Matt Landry, a portfolio manager for Lazard Global Listed Infrastructure, says his fund looks for stability in U.S. electricity utilities that still enjoy a monopolistic position in their regions and so are less affected than other power utilities by fluctuations in oil and gas prices. The Lazard fund yielded about 4.2% for the past 12 months.

Caution on MLPs

A subset of funds primarily own stakes in master limited partnerships, or MLPs, that transport and store oil and natural gas. Advisers have recommended these vehicles as a source of income over the past few years. The funds, however—like MLPs themselves—could lose value when rates start to rise again and investors return to bonds as an attractive investment.

image001-8

Some infrastructure funds limit their investments to companies that get a majority of revenue from operating infrastructure assets. Others don’t have strict requirements. Similarly, as a whole, the funds follow no strict geographic pattern as to where they invest.

DWS RREEF Global Infrastructure recently had 41% of its assets in U.S. stocks, while Lazard Global says it had about 15%. The DWS fund had about 7.5% exposure to emerging-market stocks, while Lazard had 1.4%. Nuveen Global Infrastructure had a 41% stake in the U.S. and 15% in emerging-markets shares.

Michael Joyce, an adviser in Richmond, Va., says a rising middle class in developing countries will spur infrastructure development, and recommends a 2% to 5% portfolio allocation to infrastructure funds. He invests in the closed-end Macquarie Global Infrastructure Total Return.

Robert Goldsborough, an ETF analyst for Morningstar, recommends iShares Global InfrastructureIGF -1.14% a “granddaddy” among infrastructure ETFs. In a recent report, he said the fund offers “a broad, diversified and inexpensive way to invest in infrastructure firms.” It has expenses of 0.48% of assets a year and delivered a 3.5% yield over the past 12 months, Morningstar says.

 

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: