Nothing beats a bridge, toll highway or tunnel as a stable, long-term investment, but just try buying one for your registered retirement savings plan.
Infrastructure investing has caught on in a big way with multibillion-dollar pension funds because it offers a reliable way to help generate the returns needed to pay retirees their benefits. What works for pension funds will work for individual investors, but with one major difference.
Whereas pension funds have the financial heft to buy an actual ownership stake in a power plant or pipeline, individual investors are best to approach assets like these through mutual funds, closed-end funds and exchange-traded funds. These products hold the shares of global companies that own and operate everything from airports to utilities providing electricity and natural gas.
An example is the brand new Sentry Select Lazard Global Listed Infrastructure Fund, which recently began trading on the Toronto Stock Exchange. It invests in companies such as Autostrada Torino-Milano, an Italian operator of toll roads; Enagas, a Spanish gas utility; Flughafen Wien, an Austrian airport operator; and, Spark Infrastructure Group, an Australian electrical utility. The fund pays quarterly income that cumulatively yields about 5 per cent annually at current unit prices, and its investment objective is to provide a total return of the inflation rate plus five percentage points.
"We think infrastructure is a burgeoning area," said Gordon Higgins, vice-president of equities at Sentry Select Capital Corp. "It's easy for the investor to understand -- there are tangible assets with the potential for long-term performance."
There's no doubt that pension funds are big believers in owning hard assets like bridges. The largest few Canadian pension funds -- giants such as Ontario Municipal Employees Retirement Board (OMERS) -- have as much as 5 to 6 per cent of their assets in infrastructure. The pension consultants at Watson Wyatt Worldwide report that other big pension funds are just starting to invest in this sector and have roughly 1- to 2-per-cent exposure.
Some examples of pensions owning infrastructure: OMERS jointly owns the Detroit River Rail Tunnel with Canadian Pacific Railway, Ontario Teachers Pension Plan owns a piece of Northumbrian Water Group, a water utility in Britain, and the Canada Pension Plan has an investment in Transelec, an electrical utility in Chile.
Assets like these offer a range of benefits to pension funds, and they can do likewise for individual investors. First off, infrastructure is considered a hedge against inflation because the revenues produced tend to rise along with the cost of living. Also, bridges and roads aren't vulnerable to the ups and downs of the economy or the stock markets, and returns are predictable.
"It's countercyclical, very fixed and offers very low volatility," said Benjamin Tal, a CIBC World Markets economist who issued a report this week titled "Infrastructure: The New Frontier."
Normally, low volatility means low returns in an investment. But Mr. Tal noted in his report that global infrastructure portfolios have consistently offered better returns than global stock indexes since the beginning of the decade. In the past two years alone, publicly listed infrastructure companies have delivered a return of 60 per cent, about 20 percentage points better than the return on the MSCI World Index.
Mr. Tal said this trend can be explained partly by demand for infrastructure investments from investors such as pension funds, and also by a decline in interest rates that have made holding bonds less attractive for investors who value stability. Can infrastructure continue to deliver big returns? Mr. Tal believes the answer is yes as a result of continuing strong demand from investors.
OMERS, for example, has set a long-term target of having 15 per cent of its assets in infrastructure, up from 5.7 per cent in 2005 (the most recent year for which there are figures). The Public Sector Pension Investment Board, which invests pension money for public servants, the Canadian Armed Forces and the RCMP, just this past year introduced a new 8-per-cent target for infrastructure investing.
For pension funds, there should be lots of opportunity to buy bridges, roads, ports and such. Mr. Tal said there are requirements for many billions worth of infrastructure spending in Canada, the United States and developing economies such as China and India. At the same time, governments are becoming increasingly willing to allow private sector participation in these projects.
Individual investors face a greater challenge in getting exposure to infrastructure because the fund industry has only just started to develop the category. AIC Funds, Investors Group and Criterion Investments are among the few mutual fund companies in the field, and almost all their products have a track record of less than a year. One of the few veterans in the category is Investors Global Infrastructure Class, which made 24.9 per cent in the 12 months to Feb. 28 and an average annual 14.1 per cent over the past three years.
There's a larger selection of products in the world of closed-end and exchange-traded funds. Both of these types of funds are listed on stock exchanges, but they differ in that an ETF's holdings mirror a stock index while a closed-end fund has a manager who selects stocks.
An exchange-traded fund in the same niche is the SPDR FTSE Macquarie Global Infrastructure 100 ETF, which is listed for trading on the American Stock Exchange. The Macquarie name is one you'll see a lot in the infrastructure realm. This Australian-based financial services firm is a global leader in running investment funds focusing on companies that own and operate toll highways, airports, water and telecom utilities and so-called social assets such as hospitals, schools and prisons.
Macquarie runs several funds listed on the New York Stock Exchange, and it's involved in a recently launched closed-end fund on the Toronto Stock Exchange called Macquarie Nexgen Global Infrastructure Corp. It holds shares in enterprises such as Auckland International Airport Ltd. of New Zealand, U.S.-based Kinder Morgan Energy Partners LP and a pair of Macquarie's own divisions, one that runs airports in Europe, Britain and Australia, and another that runs toll roads in Canada and elsewhere.
There's also a TSX-listed Macquarie-run income trust, Macquarie Power & Infrastructure Income Fund, which runs an electrical power plant in Cardinal, Ont., and a chain of Ontario retirement homes called Leisureworld.
Owning infrastructure is all about generating a reliable flow of income, so it makes sense that infrastructure funds often pay regular distributions. The Macquarie Nexgen fund yields about 5.9 per cent based on a unit price around $10.20 and an annualized payout of 60 cents. Macquarie Power & Infrastructure, with its smaller and thus riskier portfolio, yields about 9.6 per cent.
The ultimate comment on the risks associated with infrastructure investing is that large, well-run pension funds are embracing it. But this doesn't mean that owning the companies that own toll roads and bridges means clear sailing. Mr. Tal said the biggest concern is political rather than financial. He cited the case of a Bolivian city's water system being sold to a private company in 1999, and the contract being cancelled after rioting that occurred in response to soaring water costs.
Political risk is highest in emerging markets and not the developed markets that most infrastructure funds focus on, Mr. Tal said. And yet, he noted that countries such as China and India have shown more openness to privatization of their infrastructure than Canada.
Investing in roads, bridges and tunnels may not sound like a hot investing trend, and maybe it never will be with small investors. But pension funds, home to some of the shrewdest investing minds, are definitely hooked. "The infrastructure story is just beginning," Mr. Tal said. "Institutional investors are only now starting to open up to it."
INVESTING IN BRICKS AND MORTAR
Investing in infrastructure is increasingly popular with pension funds because of the stable returns. Here's a selection of investment funds for retail investors that offer an opportunity to buy into companies active in such areas as toll highways, bridges, electrical, water and gas utilities, airports and pipelines.
|Global Infrastructure 100 ETF||GII-Amex||$54*||-||-||0.6|
|Copernican World Financial|
|Macquarie Global Infrastructure|
|Total Return Fund||MGU-NYSE||$30.26*||5.2||41.3||2.58|
|Macquarie/First Trust Global|
|Dividend & Income Fund||MFD-NYSE||$27.74*||6.2||25.5||3.59|
|Global Infrastructure Corp||MNF-TSX||$10.10||5.9||-||1.75|
|Macquarie Power &|
|Infrastructure Income Fund||MPT.UN-TSX||$10.77||9.6||-1.5||n/a|
|Sentry Select Lazard Global|
|Listed Infrastructure Fund||GLS.UN-TSX||$9.92||5||-||1.75|
|AIC World Infrastructure|
|Income & Growth||-||-||5.1||-||2.0**|
|Criterion Water Infrastructure||-||-||-||-||1.0**|
|Investors Global Infrastructure Class-||-||-||24.9||2.97|
|**Management fee only. Actual MER will be higher|
© 2007 The Globe and Mail. All rights reserved.
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