Investing: Smart Global Infrastructure Plays

Pros see opportunity as governments around the world continue to pour stimulus money into big projects

By David Bogoslaw

Investors in infrastructure are taking a broader view of the kinds of stocks they want to own these days. That's partly in response to the slow pace at which U.S. government stimulus money is being funneled into public projects. It's also attributable to fund managers' hunger for stocks with more predictable cash flow and earnings prospects that are less tied to the strength of the economy overall—in other words, companies that enjoy a monopoly on facilities and services that get paid no matter how poorly the economy is doing.

Rapid economic growth and rising standards of living in developing countries such as China, India, and Brazil, and the accelerating trend toward urban living are driving the need to invest in core infrastructure systems such as water, electric power, and telecommunications.

There would seem to be more than enough money that needs to be spent on fortifying, if not rebuilding, America's bridges, highways, and water treatment systems—$2.2 trillion in investment over the next five years, by the American Society of Civil Engineers' calculations. The general condition of these essential assets is horrifying: The highest grade earned on the ASCE's 2009 infrastructure report card was a C+ for solid waste treatment, while nearly three-quarters of the categories rated a D, including roads, dams, and levees.

U.S. Global Diversifies

The $787 billion stimulus package that U.S. lawmakers passed in February includes roughly $81 billion earmarked for public infrastructure. Of the $27.5 billion allocated for highway and bridge construction, only $2.8 billion in reimbursements has been applied so far by recipients, which suggests that just a little more than that has been spent in total, says Josh Duitz, who co-manages the Alpine Global Infrastructure Fund (AIFRX). He expects an additional $15 billion of the $27.5 billion to be spent in 2010.

In January 2008, sensing the economy was about to or had already entered a downturn, Jacek Dzierwa, an investment strategist who helps manage the U.S. Global Investors Global MegaTrends Fund (MEGAX), began to diversify away from construction and engineering (C&E) stocks into a broader range of companies, focused on alternative energy, water treatment, wireless communications towers, and steel production. He has also embraced companies in emerging markets such as Brazil and China, which he says have boosted the fund's performance this year. Year-to-date as of Oct. 15, the fund was up 27.5%.

One reason that he favors Canadian C&E stocks such as SNC Lavalin Group (SNC.TO) is that there are comparatively few large global companies in smaller markets to satisfy investor demand. Also, in Canada, provincial and federal money is flowing to projects faster than anticipated, especially in the second half of this year. The fact that SNC Lavalin employs French-speaking managers has helped it win contracts in French-speaking North Africa. Algeria is especially busy building desalination plants, liquefied natural gas plants, and roads, says Dzierwa.

Cohen & Steers Bets on Monopolies

Robert Becker, director of infrastructure investment and research at Cohen & Steers Capital Management (CNS) and co-manager of the Global Infrastructure Fund (CSUAX), tries to keep his exposure to such cyclical plays to a minimum. Instead, he concentrates on companies that own and operate assets with monopoly-like characteristics that make it hard for would-be competitors to take away market share.

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