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Mutual Funds: Planes, Trains and Utilities

Water utilities, toll roads and airports are steady revenue generators, despite a slowing economic climate.

In recent years, institutional investors have purchased the rights to operate such busy toll roads as the Chicago Skyway and the Indiana Toll Road. At a time of weak corporate profits and declining stock markets, the toll roads seem like especially appealing investments. The roads are monopolies that relentlessly collect cash from drivers seven days a week. What's more, the highway operators can raise income by simply increasing tolls.

In the past, retail investors could only look at highway monopolies with envy — getting a piece of that business was strictly for the big boys. But now, new infrastructure funds aim to provide some of the characteristics that institutions have long enjoyed. Besides investing in operators of toll roads, the infrastructure funds hold stocks of companies that deliver steady income and provide essential services, including pipelines, utilities and airports.

Some of the infrastructure investments can offer compelling growth. In the U.S. and overseas, corporations and government agencies are racing to satisfy the need for new airports, power plants and highways. “There will be tremendous profit potential in infrastructure around the globe for years to come,” says Mark Biegel, managing director of Biegel & Waller LLC, a registered investment advisor in Columbia, Md., that clears trades through Fidelity Institutional.

For several years, pensions and institutions have sought infrastructure funds as vehicles that could provide high yields, and help to diversify stock portfolios. The Standard and Poor's Global Infrastructure index currently yields 3.6 percent, compared to a yield of 2.2 percent for the S&P 500. The S&P infrastructure index has a correlation of 0.7 with stocks, suggesting that the index tracks overall stock markets about 70 percent of the time. Lately, infrastructure stocks have been slipping along with markets around the world. But during the five years ending in June, the S&P infrastructure index returned 22.7 percent annually, about 10 percentage points ahead of global stocks.

You Can Play

To participate in infrastructure, retail investors have a dozen choices, including exchange-traded funds, as well as open-end and closed-end funds. Most have short track records, so advisors need to proceed cautiously. To track the S&P index, consider an ETF, iShares S&P Global Infrastructure Index (IGF). The index holds 75 large companies, with about 40 percent of assets in utilities, 40 percent in transportation and 20 percent in energy infrastructure. The stocks come from 19 countries. The fund has 25.4 percent of assets in the U.S., 8.9 percent in Germany and 5.2 percent in China. Big holdings include TransCanada, a pipeline company; and Iberdrola, a Spanish utility.

Another ETF is SPDR FTSE/Macquarie Global Infrastructure 100 (GII). While the iShares ETF provides a cross section of infrastructure blue chips, the SPDR choice focuses on utilities, holding 89 percent of its assets in the sector. Big holdings include E.On, a German utility; and FPL, an electric producer based in Florida. The fund has 38.2 percent of assets in the U.S., with 12.3 percent in Germany and 0.3 percent in China.

To go beyond the blue chip utilities, consider Macquarie Global Infrastructure Total Return (MGU), a closed-end fund, which has 24.3 percent of assets in pipelines, 20.0 percent in toll roads and 11.3 percent in electric distribution. Many of the holdings are little-known European companies. “Macquarie gives diversified exposure to the whole infrastructure universe,” says Alex Reiss, a closed-end fund analyst with broker Stifel Nicolaus, who recommends the Macquarie fund.

The fund, which pays a nice dividend of 7.19 percent, sells for a 12.7 percent discount to its net asset value. That is an attractive discount for the fund, says analyst Reiss.

Income-oriented investors may prefer Macquarie/ First Trust Global Infrastructure (MFD), a closed-end fund, which yields 8.79 percent. Along with a big stake in utilities, the fund increases its yield by holding bonds.

Another broadly diversified choice is First American Global Infrastructure (FGIAX), an open-end mutual fund. Besides water utilities and toll roads, the fund holds airports, parking lots and ports. Portfolio manager Jay Rosenberg favors European construction companies that are building airports and toll roads. “We prefer businesses with long-term contracts and stable cash flows that will not decline much when the economy turns down,” Rosenberg says.

The fund avoids volatile stocks that rise and fall with the economy or commodity prices. Rosenberg underweights companies that are involved in exploration for energy because that business is cyclical. Instead, he holds stocks such as Enbridge, a Canadian pipeline company that derives steady income from shipping oil to the U.S. The pipeline company's income depends on the volume it ships, not the price of oil.

About 5 percent of First American's portfolio is in renewable energy, including wind and hydro power. Because of the environmental issues posed by carbon-based electric generation, Rosenberg says that demand will grow for renewable sources. The opposition to building traditional power plants will also create more business for companies that provide transmission of power. He figures that power from underutilized plants will be shipped long distances to meet growing demand. A big holding is Northeast Utilities, a Connecticut-based company that derives much of its income from transmission of power produced by other providers.

Like First American, Kensington Global Infrastructure (KGIAX) goes beyond standard power producers. The open-end fund has 22 percent of assets in oil and gas transportation, 11 percent in airports and 16 percent in highways and railroads. Portfolio manager Aaron Visse divides the portfolio into two sectors. About 80 percent of assets are in solid companies that own or manage existing infrastructure. Many of these stocks could be considered value shares, with stable dividend yields and modest price-earnings multiples. The rest of the assets are in fast-growing holdings that are building new projects. “The fund's aim is to provide steady growth and do better on the downside than the overall market,” says portfolio manager Visse.

Since opening a year ago, the fund has offered shareholders some protection. During the 12 months ending in June 2008, Kensington returned 1.3 percent, compared to a loss of 11.9 percent for the Morgan Stanley Capital International world stock index. That is the kind of solid showing that infrastructure funds seek to deliver.


Funds that bet on the boom in global infrastructure.

Fund Name Ticker Type of Fund Inception Expense Ratio
First American Global Infrastructure (FGAIX) open-end 12/2007 1.25%
iShares S&P Global Infrastructure (IGF) ETF 12/2007 0.48
Kensington Global Infrastructure (KGIAX) open-end 6/2007 1.47
Macquarie/First Trust Global Infrastructure (MDF) closed-end 3/2004 1.73
Macquarie Global Infrastructure (MGU) closed-end 8/2005 1.54
SPDR FTSE/Macquarie Global Infrastructure (GII) ETF 1/2007 80.60
Source: and Morningstar.
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