Infrastructure funds may have been building interest ever since President Barack Obama announced his commitment to rebuilding America's infrastructure, but the managers of the First American Global Infrastructure fund have been laying the groundwork for years.
"We want to provide a very unique asset allocation to investors that is different than other assets in their portfolio," said Jay Rosenberg, lead portfolio manager of infrastructure for FAF Advisors and co-manager of the global infrastructure fund. "Infrastructure is a discrete asset class that provides stable and reliable cash flow streams."
Rosenberg said his fund looks for companies with hard assets such as hydroelectric dams, prisons, cell phone towers and landfills, rather than companies that rely on volatile commodities or on the whims of regulators.
"Regulators are appointed to their positions," he said. "When the wind changes, so can the regulators."
Rosenberg said he got the idea for a unique infrastructure fund several years ago when he was working in real estate and noticed that infrastructure company rates were 200 basis points higher than real estate. Not only that, but infrastructure had much more stable cash flows and a more reliable market.
"We were marketing real estate wares to pension funds and saw they had infrastructure investments," he said. "Because of the size of the infrastructure assets, they could only afford exposure to a few, which increased their diversification risk by only having a few assets."
An infrastructure fund could make investment much more accessible, he thought, but as he began to look closer, Rosenberg noticed that many of the infrastructure companies had less-than-ideal assets.
"Not all energy assets are created equal," Rosenberg said. "Some companies are not infrastructure companies, even though they fall into the same sector. We focus on companies that have very stable cash flows."
First American's fund, launched in December 2007, has diversification in more than 20 different sectors and several different countries. In addition, it has hard assets and a low correlation to GDP, he said. As of press time, the fund (FGIAX) had $29.63 million in assets. The fund declined 35.1% in 2008 and was down 5.9% year-to-date through Jan. 31.
"We seek out companies that own, build or operate tangible assets," he said. "So rather than select an electric company that generates power from coal, we opt for one that owns the grid. Such stocks, we believe, should offer visible stable returns, improving the overall risk/return profile of an investment portfolio."
Four Silos
Rosenberg said his fund focuses on the fundamental characteristics of infrastructure and has divided the fund into four silos: transportation, energy and utilities, social infrastructure and technology infrastructure.
For the transportation category, the fund selects companies that own toll roads, airports, seaports, commuter rail lines and parking lots, he said.
For energy and utilities, Rosenberg said the fund prefers monopolistic companies with unconstrained demand, such as hydroelectric dams and electric utilities.
"We are primarily focused on transmission and distribution assets," Rosenberg said. "The transmission grid has been underinvested in. It has become unreliable."
The fund also invests in the transportation of clean water to cities, wastewater and desalination plants. Rosenberg said he prefers companies with hard assets such as incinerators and landfills.
In the social infrastructure category, the fund invests in companies that own or operate assets that governments have historically owned or operated facilities, such as prisons, foreign post offices and nuclear decommissioning plants.
For the technological infrastructure category, the fund selects companies that own and operate satellites, due to the extremely high barriers to entry for the cost of launching a satellite, as well as cell phone tower companies and data centers located at crucial points in the electrical and Internet grids.
Great Timing
"There is renewed vigor and demand for infrastructure," said Christopher Armstrong, senior consultant for Ibbotson Associates Investor Management Services. "A lot of people may not correctly interpret what infrastructure can bring to their fund."
Rosenberg said infrastructure funds can be a part of all types of portfolios, including retail and institutional investors.
"Infrastructure funds have been shown to add returns to well-balanced portfolios without bringing risk," he said.
"Infrastructure makes sense in a diversified portfolio," Armstrong said. A well-diversified portfolio could consider having between 2% and 6% allocated to infrastructure, depending on the risk tolerance of the investor, he said.
Unique infrastructure - those infrastructure assets that are not already considered part of other established asset classes like private equity or real estate - is largely missing from investors' portfolios, Armstrong wrote in a white paper titled "Infrastructure and Strategic Asset Allocation: Is Infrastructure an Asset Class?"
The white paper concludes by saying, "We believe infrastructure is an asset class and should be part of the strategic asset allocation opportunity set. Unfortunately, most broad definitions of the infrastructure asset class overlap with other asset classes."
Armstrong said he thinks infrastructure should have a relatively narrow definition for asset allocation purposes that focuses on unique infrastructure.
"We recognize that most investors cannot access direct infrastructure, the type of investment that most closely replicates the theoretical definition of unique infrastructure," Armstrong wrote. However, "a number of investors will choose to gain exposure to infrastructure using the best available implementation vehicle, listed infrastructure stocks, just as they have used REITs to gain exposure to real estate."
Rosenberg said many of the companies the fund owns are jointly owned by governments and the public.
"We view stimulus plans around the world as gravy," he said.
Any stimulus package will benefit infrastructure developers, not owners. Developers are cyclical companies that are highly correlated to GDP, and Rosenberg said his fund tries to avoid them.
"Certainly there is great interest in infrastructure," Rosenberg said. "Every journalist I've talked to has asked me that question. The timing is excellent. We think the appeal of infrastructure will remain very high."
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