Companies that own and operate bridges, roads, and power plants may offer built-in protection against the risk of runaway prices
As inflation expectations climb, many investors are looking to buttress portfolios with assets that can hedge against that risk. Publicly traded infrastructure companies can be as effective a hedge against inflation as commodities and real estate, say the growing number of fund managers specializing in such companies. There's one catch: The chosen companies must own and operate toll roads, bridges, or regulated power plants under long-term concessions, rather than merely build them or supply materials for them.
While the fortunes of builders and companies supplying such materials as cement are tied to the ups and downs of economic cycles, owners and operators of core assets such as toll roads enjoy high barriers to entry, stable cash flow in all economic climates, and the ability to increase prices in line with a measure of inflation or economic growth. Many of the companies also offer above-average dividends?the average is about 3.5 percent for companies in the iShares S&P Global Infrastructure index (IGF). That's nearly double the dividend yield for the average company in the Standard & Poor's 500-stock index. Long an investing option for institutional investors through private equity deals, funds focused on global infrastructure have gone mass market in recent years. More than half of the 13 global infrastructure mutual funds that Morningstar (MORN) identifies have been around less than three years. Four launched last year.
Infrastructure as an asset class has underperformed other inflation hedges over the past year, which presents an opportunity, says Aaron Visse, co-manager of the Forward Global Infrastructure Fund (KGIAX). The Standard & Poor's Global Infrastructure index was up 6.9 percent for the year ended Mar. 31, vs. a 34.9 percent gain nfor the S&P GSCI Commodities Spot index and an 18.2 percent rise for the S&P Global REIT index. According to Visse, the infrastructure index's 41 percent weight in European companies was largely to blame for its underperformance, given worries about governments' "ability to finance infrastructure in the age of austerity." Visse says investors forget that a lot of assets are already owned in the public markets and don't depend on government spending. If budget constraints slow government-sponsored projects, it means less competition for existing assets in the foreseeable future, he adds.
Net Inflows Since October 2010
Retail investors seem to be coming around to Visse's view. After experiencing cumulative net outflows from all infrastructure-related funds, excluding utility funds, from March 2010 to September 2010, the funds started reporting net inflows last October. Inflows were up to $563 million by February 2011, according to data from EPFR Global, a Cambridge (Mass.)-based data provider. Money flows into infrastructure exchange-traded funds show a similar shift in investor sentiment. Net inflows averaged $20.5 million from January 2010 through August 2010, jumped to $117.3 million in September, and peaked at $232.7 million in December, according to TrimTabs Investment Research of Sausalito, Calif. Net inflows slowed to just under $120 million in January and rebounded to $154.6 million in March.
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