As the year putters along and Washington seems unable to push through much-needed funding for infrastructure, infrastructure investors’ balloons have slowly deflated. While pegging an investment strategy to political outcomes may not be the soundest strategy, there are companies that stand to benefit hugely if increased government spending does pass.
Sooner or later, my feeling is the money will start to flow. The situation, after all, is rather dire. In 2013, the American Society of Civil Engineers (ASCE) released an “Infrastructure Report Card,” giving the U.S. an uninspiring D+ rating.
They estimate the cost to repair and modernize infrastructure at over $10 trillion by 2040, half of which is currently unfunded.
The need is clear. When politicians from both sides of the aisle can agree on and approve additional spending, the three funds here will be big winners.
‘Trump Bump’ Funds: Global X Funds U.S. Infrastructure ETF (PAVE)
Net Expenses: 0.47%
Here’s a newly launched exchange-traded fund that’s a pure play on U.S. Infrastructure, the Global X Funds Global X U.S. Infrastructure Development ETF (BATS:PAVE). Most infrastructure ETFs have global exposure, so this is a more targeted option for investors looking for heavily domestic exposure.
Another point of differentiation is that unlike many existing infrastructure funds that are heavily weighted in the utilities and energy sectors, PAVE invests in companies involved in the following: construction and engineering of infrastructure projects; production of raw materials, composites and products for use in infrastructure projects; producers and distributors of heavy construction equipment; and companies engaged in the transportation of materials for infrastructure development.
This is a clear advantage if and when government investment in infrastructure increases. Its strategy gets exposure to companies that will get a boost in revenues from increases in both publicly and privately funded projects. Construction and development would be the major beneficiaries and this is exactly where PAVE is focused.
As of March, the fund does just what it says with a 67% allocation to industrials, 27% to materials and the remainder spread across IT and utilities. Since the fund is so new, there’s little historical performance to review, but for frame of reference, since inception, the fund is down 2.8% (cumulative) to the index’s -2.7%. While it hasn’t had a catalyst yet, it does track closely.
‘Trump Bump’ Funds: Lazard Global Listed Infrastructure Portfolio (GLFOX)
Net Expenses: 1.23%
The guys at Lazard know what they’re doing. For the past five years and counting, Lazard Global Listed Infrastructure Portfolio Open Shares (MUTF:GLFOX) has handily beat the MSCI ACWI NR benchmark. Last year, the outperformance delta was only 1.1%, but the year before it was 11.4% and in 2014 it was 13.5%! There is a lethal combination of consistency in delivering returns for shareholders and lumpiness on the upside.
While, GLFOX generally invests around 30% to 40% of the portfolio in international infrastructure companies, or U.S. companies that have a sizable non-U.S. business, as conditions change stateside, the portfolio managers will recognize and rebalance. Currently, the fund holds 11% in cash, so it stands at the ready for opportunities that arise.
The fund’s largest U.S. holding is Norfolk Southern Corp. (NYSE:NSC), a rail transportation business that operates approximately 19,500 miles of road primarily in the East and Midwest. Even without a boom in construction NSC earns decent returns on equity and gives investors a 2% yield, but there is substantial upside when higher spending comes through.
More orders for raw materials and finished products means more cargo for them to ship and earn revenue. This is the kind of company that will be able to capitalize on a spending tailwind.
‘Trump Bump’ Funds: Reaves Utilities and Energy Infrastructure Fund (RSRFX)
Net Expenses: 1.51%
Fees are a bit higher than I would like, and fund performance is a tad spotty … but philosophically, I’m on board with Reaves Utilities and Energy Infrastructure Fund Class Institutional (MUTF:RSRFX) (Maybe spotty is a bit harsh.) In 2016, RSRFX blew away the benchmark by 11.3%. It was preceded by an underwhelming 2015, but that in turn was preceded by a strong 12.6% return in 2014.
Energy companies did them in in 2015, but the overall approach is different and does generate results. Many funds will tout a growth angle or value strategy, but William Ferer (who has run the fund since 2004) and his team utilize an active trading approach to select securities that offer the potential for positive total return during a three to five year period.
This in addition to a focus on balance sheet strength, expected earnings, and cash flow is how the fund generates alpha. The overall weighting is heavily U.S. stock at 92%. And since it’s domestic companies that stand to benefit the most directly from investments in infrastructure, this vehicle gives investors a good amount of exposure.
The fund only has a little over a percent in cash, meaning that 99 out of 100 dollars you invest goes to work for you straightaway. Some investors prefer managers that keep a bit of dry powder on the sidelines. This is for those who prefer an almost fully invested fund.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.