In a world of fast-growing and far-reaching infrastructure development, portfolio manager Ben Morton points out that investing in the sector is no longer just about funneling money directly into complex and tax-unfriendly master limited partnerships.
Mr. Morton, along with Robert Becker, co-manages $2.6 billion in infrastructure assets at Cohen & Steers Inc., including the Cohen & Steers Global Infrastructure Fund Ticker:(CSUAX). “We're investing in owners and operators of infrastructure assets, including toll roads, airports and turnpike owners, because we want defensive, inflation-protected cash flow streams,” Mr. Morton said.
While infrastructure investing is often associated with master limited partnerships or funds that invest in MLPs, Mr. Morton has just 4% of his portfolio allocated to MLPs.
As both developed and developing economies have experienced a surge in infrastructure growth, Mr. Morton has found that it's not always necessary to invest in the asset class through the more complicated MLP structure.
“The infrastructure investing strategy probably has a history of 10 years or less,” he said. “But the depth of the market has certainly changed and the overall size of the market has improved.”
The driving forces behind the expansion of the category are coming both from cash-strapped developed economies that are selling off income-producing assets to infrastructure companies, and from the desperate need for new infrastructure in developing nations.
“Globally, massive investments are needed in infrastructure, whether it's the need to replace and upgrade in developed markets or in developing markets when the need is powered by demographic trends,” Mr. Morton said. “And it's all happening at a time when government balance sheets are stressed and they can't afford to go it alone, so they are encouraging private investment.”
Morningstar Inc. doesn't yet have a specific category for infrastructure investments, but it does identify 18 infrastructure mutual funds with more than $3 billion in combined assets.
Of those funds, only three were around prior to 2007, including the Cohen & Steers fund, which was launched in 2004 primarily to focus on utility infrastructure.
The fund's strategy was broadened in 2008 to include transportation, which gave it a more global focus. The fund now is just 38% allocated to U.S. companies.
The infrastructure fund assets from the Morningstar snapshot have more than tripled since 2009, when the funds had less than $1 billion.
While the infrastructure category is often associated with strong dividend income, Mr. Morton explained the pace of growth is such that many companies are spending more money on growth and less on dividend distributions. “Right now, there is a lot of money to be spent in this space," he said. "And companies are balancing the return of capital to shareholders with significant investment opportunities.”
Part of the appeal of infrastructure, beyond dividend income, is its function as an inflation hedge.
“Think about toll roads, for example,” Mr. Morton said. “Every year, the companies can increase the tolls linked to inflation, and that makes the cash flows a good inflation hedge.”
So far this year, Mr. Morton's fund has gained 10.3%. The S&P 500 has gained 14.3% and the 18 infrastructure funds tracked by Morningstar have returned an average 11.6%.
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