The need to maintain, replace and expand infrastructure is a costly global issue. According to Infrastructure Investment, infrastructure is a market where $25 trillion of capital will be invested over the next decade. A few months ago Obama assembled an $850 billion infrastructure spending plan and it is the biggest government infrastructure investment in the US since the interstate highway system was launched in the 1950s. With a similar amount being pledged by the Chinese and other governments around the word, it seems like the infrastructure boom has arrived and investors are ready to take full advantage of this revolution.
Mohamed El-Erian, CEO of PIMCO, one of the largest investment management companies in the world, suggested the following asset allocation for average investors in his new book, When Markets Collide:
- 50% Equity
- 14% bonds
- 27% Real Assets such as real estate (6%), commodities (11%), inflation protected bonds (5%) and infrastructure (5%)
The rest should be in other special opportunities.
In other words, he believed investors should reduce their bond exposure and move to real assets such as infrastructure. Bonds face headwinds in maintaining their current role in investment portfolio due to higher inflationary pressures and portfolio adjustments among sovereign wealth funds (SWFs) that serve to reduce their relative holdings of fixed-income instruments.
Companies involved in the infrastructure sector are generally within the following industry segments:
- Airport / Highways / Railroad / Ports / Bridges / Tunnels
- Utilities: Electric, Gas, Water, Alternative, etc
- Transmission systems / Distribution systems
- Oil & Gas Storage & Transportation
- Construction & Engineering , Heavy Electrical Equipment
- Education facilities / Healthcare properties
- Communications towers / Cable networks
Currently there are 3 infrastructure ETFs on the market:
1. iShares S&P Global Infrastructure Index (IGF)
With net assets of $201 million, it is the biggest infrastructure ETF and has a very balanced sector weighting: Utilities 38% and Business Services 34%. Its yield is 3.82% .
2. SPDR FTSE/Macquarie Global Infra 100 (GII)
A distant 2nd , with market cap of $56.7 million. It concentrates on one sector only:
Utilities accounts for more than 82% of its holdings.
3. PowerShares Emerg Mks Infrastructure (PXR)
The smallest sector ETF with a market cap of $10.9 million. It is dominated by the Industrial Materials sector, with 69% of of its weighting there.
Below are the top holding companies within these 3 ETFs:
Spectra Energy Corp
FPL Group, Inc
Ingersoll-Rand Co. Ltd
Source: Source: Yahoo Finance as of 04/10/09.
Over the last 2 years, there was virtually no difference between SPDRs (SPY) and GII in terms of performance. IGF did even worse than SPY. If you compare performance since the date Obama announced his $850 billion plan on December 18, 2008, SPY has outperformed both GII and IGF by about 10%.
However, TransCanada Corporation (in green) stands up and had a better return. TransCanada (TRP) is part of IGF and it provides energy infrastructure principally in North America with market cap of $15.2B. Its network of more than 36,500 miles of pipeline taps into virtually all-major gas supply basins in North America. TransCanada is one of the continent’s largest providers of gas storage and related services with approximately 370 billion cubic feet of storage capacity.
According to TransCanada’s annual report, its outstanding debt is about $16 billion. Principal repayments on the long-term debt of TRP for the next five years are approximately as follows: 2009 – $786 million; 2010 – $531 million; 2011 – $1,014 million; 2012 – $1,370 million; and 2013 – $1,180 million. On February 17, 2009 and January 9, 2009, TransCanada just completed the issuance of Notes of total $2.7 billion maturing in 2014, 2019 and 2039, and bearing interest from 5.05% to 8.05%. All infrastructure companies, including TransCanada, are capital intensive by nature.
If credit crunch condition doesn’t improve, it might become harder and harder to get finance. TransCanada just boosted its quarterly dividend from $0.36 to $0.38. With yield of $5.8% and payout of 68%, I am willing to park 2% of my portfolio in TRP.
Disclose: I have long position on TRP and SPY and owner of PointFinancialAdvisor.com.