Invest Like a Billionaire: Infrastructure Stimulus

Photo: Brave Heart

Hit a pothole lately? Or perhaps you’ve suffered through a power outage or a water main break?
 
“Anyone who travels within or among our major metropolitan areas knows that we are a first class economy with a third class infrastructure,” said Bruce Katz, Director of the Brookings Institution Metropolitan Policy Program to the attendees of ‘The Next American Economy’ Conference earlier this year. “Our current path is not sustainable. It is economic suicide to expect our major ports, freight hubs and rail corridors to do what it takes… on their own… to stay one step ahead of global forces.”
 
Katz called for establishing a National Infrastructure Bank to upgrade congested ports, build high-speed passenger rail links like those in Europe and improve the building blocks of U.S. metro areas like Los Angeles, New York City and Chicago.

Building Boom

More than half of the world’s population lives in urban and metropolitan areas. By 2030, that number is expected to rise to 60%. This groundswell from Cairo to Caracas will need new and upgraded infrastructure.
 
Infrastructure expenditures are forecast to be 2.5% of global GDP over the next two decades, according to an OECD study “Infrastructure to 2030: Mapping Policy for Electricity, Water, and Transport.” Make that 3.5% if you include electricity generation and other energy-related infrastructure. (Think that sounds unimpressive? In 2008, global GDP topped $61 trillion, so that “measly” 3.5% was actually a 13-digit number.)
 
China tops even those estimates in terms of percentage of GDP dedicated to infrastructure: 9% last year. A big chunk of that went to the rail sector, which saw a 70% increase in fixed asset investment.
 
George Beshara, research vice president at financial services firm Pharos Holding has high expectations for other regions, as well. “[The Middle East and North Africa] region is poised towards strong construction spending with the main focus on infrastructure,” he says.  Beshara cites Egypt as an example where the government is opening waste water, power stations, roads and hospital projects to private partners.

Set to benefit: Low-key billionaire Riley Bechtel, whose family began building infrastructure more than a century ago as a railroad-grading operation in the Oklahoma Territory. Since then, four generations of the Bechtel family have headed 22,000 projects in 140 nations. Among their best known projects are Hoover Dam, the Channel Tunnel, and the San Francisco Bay Area Rapid Transit (BART) system. Today, Forbes estimates Riley’s net worth at $3 billion. 

In the U.S., companies like Riley’s Bechtel are lining up for stimulus funds. President Obama’s American Recovery and Reinvestment Act increased federal government construction spending to $145 billion. 70% of Recovery Act funds are expected to be doled out by this fall.

The Environmental and Protection Agency is getting $6 billion for initiatives like water-quality protection programs. The US Army Corps of Engineers will receive $4.6 billion in direct funding for its civil works program and the Department of Energy will get $36.7 billion, of which $16.8 billion is for energy efficiency and renewable energy, and $3.4 billion is for carbon capture and storage.

In addition, “increased public awareness due to tragedies such as Hurricane Katrina and the Minneapolis I-35 bridge collapse has propelled authorities to boost funding levels [beyond the stimulus package],” says Sameer Rathod, research analyst at Macquarie Capital. One example is the pending Energy and Water Development Appropriations bill for 2010 (H.R. 3183), which will appropriate $34 billion to government agencies.

Getting Your Share of the Construction Stimulus

Now may be a good time to diversify your portfolio with infrastructure investments. 

Infrastructure assets, because they are essential to the economic health and productivity of communities, can be a relatively stable investment in any market environment, according to J.P. Morgan Asset Management.  Infrastructure assets have low volatility thanks to the stability of cash flow. And they have low correlation the traditional asset classes of equity and fixed income, which can hedge your portfolio against downturns on both the stock and bond markets.
 
There are a variety of ways to participate in infrastructure investing. You can purchase shares of individual companies. Foster Wheeler, Shaw Group, McDermott, and KBR are doing well, says Macquarie’s Rathod. But investing in individual companies is tricky unless you have a sizeable portfolio that can be diversified across many different sectors.

Investors with more modest portfolios should consider exchange-traded funds and mutual funds.  A limited number of ETFs and actively managed mutual funds target infrastructure investing.  For example, First American Global Infrastructure Fund launched in 2008 for institutional investors and is now open to retail investors. It focuses on companies that own, operate or build infrastructure across three broad categories: energy, transportation and utilities.
 
On the ETF menu, PowerShares Emerging Markets Infrastructure and the iShares S&P Global Infrastructure Index Fund offer broadly diversified international infrastructure investments. Performance has been solid (though investors should remember that past performance is not an indicator for future results).
 
The five-year annualized return of the S&P Global Infrastructure Index through April 30th was 7.6%, compared with a 2.63% annualized return for the Standard & Poor’s 500 stock index.

But there are risks in infrastructure investing, according to JPMorgan. Those include a higher degree of market risk because of concentration in a specific industry or geographical sector, declines in the value of infrastructure entities, and political and regulatory risks related to general and economic conditions.
 
Investors should also note that infrastructure services account for up to 15% of the S&P 500 index based on market cap. In other words, if you own an S&P 500 index fund or ETF, you already have a significant stake in the sector.

Be sure to consult with your financial planner or adviser (if you have one) before making any radical portfolio moves.

Tatiana Serafin, a former staff writer at Forbes, now heads Global Markets and Ideas.