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Not stocks? Not bonds? How about Infrastructure?


Institutional investors have for some time included infrastructure assets in their investment portfolios. Individual investors normally can’t invest directly in infrastructure assets but they can invest in the companies that participate in the infrastructure industry. Exchange Traded Funds (ETFs) offer individuals access to these infrastructure companies. But many investors will be disappointed with the choices.

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As of the end of 2010, the average Pension Plan in Canada per PIAC had an investment of about 4% in infrastructure assets. (Larger Canadian Pension Plans like the CPP, OTPP, OMERS and BC IMC have significant allocations to infrastructure). While institutional investors have been active in the infrastructure marketplace for several years, individual investors have had limited access. I suggest that access is still limited.

Why infrastructure?

The value of holding infrastructure assets to complement traditional (stock and bond) holdings in a portfolio is a fairly recent phenomenon. In particular since markets went wacky in 2008. But also since governments everywhere have been and are starving for cash, more public assets have been privatized.

Typically, infrastructure assets deliver relatively stable returns and lower correlations to traditional asset classes like stocks and bonds. When stock and / or bonds zig, infrastructure tends to zag (or at least not zig by as much).

Further, infrastructure assets tend to be of the monopolistic sort and so demand for the services infrastructure delivers tends to be more stable. (Few of us would construct another highway to compete with the existing 407 toll highway). That means more stable returns which diversify the inherent return instability in the more traditional portfolio of stocks or bonds. (Don’t get too excited. If stocks and bonds were only appraised once a year, their returns would be more stable too).

Infrastructure types.

Infrastructure assets are generally thought of as economic (roads, bridges, airports, sea ports) or social (schools, hospitals, courthouses and prisons). Further, both economic and social infrastructure assets can be sub-categorized as either greenfield (under construction) or brownfield (operating) assets.

How to buy infrastructure assets?

Individual investors can’t buy infrastructure assets. (Well, I guess they do … through their tax dollars … and through their pension plan). The closest individual investors can get to investing in infrastructure assets is to buy infrastructure companies. These are the companies in the infrastructure industry that engage in the management, ownership and operation of infrastructure assets. And the best way to own infrastructure companies is through infrastructure ETFs. ETFs can help the individual investor avoid a direct investment in companies like, SNC Lavalin, say. See  Feb 28, 2012 post.

Infrastructure ETFs.

Prepare to be disappointed.

Infrastructure ETFs

Investors have regional and a few other ETF choices but here are four Global infrastructure ETFs. Some of the company names within some of the ETFs should be familiar ( SNC-Lavalin Enbridge TransCanada Canadian Utilities ATCO Kinder Morgan ).

See last paragraph below for infrastructure ETF links.

Investors will want to compare geographical and industry / sector exposures and should consider the ETFs focus (like on utility-like versus GDP-sensitive assets, for example). None of the ETFs have any volume to brag about. All of them are pricey. (CIF is the former Claymore infrastructure ETF).

Note: The TMX ETF selection tool is practically useless in the search for infrastructure ETFs listed in Canada. However, the IndexUniverse ETF selection tool is more helpful. At IndexUniverse: (On the right hand side) Deselect Inverse Leveraged and ETNs. Then, (right hand side, bottom) under IndexUniverse segment select Equity: Global infrastructure. GII, IGF and GRID are shown. EMIF is not shown because it is an index fund. CIF is not shown because it trades in Canada.

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Next time? More Risk Management.
Doug Cronk, CFA is Manager, Investments for a Canadian Pension Plan
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