Infrastructure projects are in¬creasing globally as a way for countries to dig out of an economic slump, and the fund industry is responding, but investors need to look closely before they jump in.
Since November, three infrastructure funds have come on the scene. But the similarity between infrastructure funds and other sector funds, and the risks inherent in investing in emerging markets, may become obstacles to their success.
“I don’t think infrastructure funds will find broad appeal,” said Jeff Tjornehoj, senior research analyst at New York-based Lipper Inc. “They are still going to be typically lumped into utilities as a strategy because they do overlap and they’re not providing the non-correlated returns that other asset classes could, like precious metals or real estate.”
Many of the funds are global.
“A lot of these funds are focusing on Asia and Africa. But there is not as much transparency in these projects, and there is the problem of more political risk or event risk in those markets,” Mr. Tjornehoj said.
EXAMINE HOLDINGS
Investors need to examine a fund’s holdings, he said.
Not all the holdings will benefit, said Scott Toms, chief investment officer at Cornerstone Wealth Management Group of Hagerstown, Md., which has $150 million in assets under management.
“The funds may be loaded up on companies that may not benefit from excess spending on infrastructure,” he said. New projects can mean more growth, while projects that improve existing infrastructure may produce lower returns, Mr. Toms said.
Still, investors can’t miss the headlines. Just last week, a report released by Toronto-based
CIBC World Markets noted that global spending on infrastructure is ex¬pected to reach $25 trillion to $30 trillion over the next 20 years.
At the same time, all eyes are
on President Obama’s proposed
economic-stimulus plan, which proposes at least $90 billion for traditional infrastructure projects and additional spending on energy and telecommunications infrastructure that will likely affect the sector.
Most of the U.S. mutual funds targeting this sector were launched in the past two years. They number less than a dozen, with a total of $904 million, Lipper reported.
But this group is growing.
In January, the Morgan Stanley Global Infrastructure Fund (UTLAX) reopened to new investors after it was recast from a utilities fund.
“We saw enormous opportunities to build, repair and now to stimulate the global economy with infrastructure spending,” said John Hartman, executive director and portfolio specialist for the New York-based fund.
“Most of the non-U.S. investment is in developed markets,” he said. “Certainly, there is exposure to China and other emerging markets, but the majority of the [international] exposure is in developed markets.”
The John Hancock Global Infrastructure Fund (JBRAX), from Boston-based John Hancock Financial Services Inc., has been in the planning stages for eight months and was launched on Dec. 31, said Andy Arnott, senior vice president of product management and development.
“Mr. Obama has helped the position of the fund, but it is not the reason why we launched this fund,” he said. “The gatekeepers at the firms, which have their own asset allocation methodology, are looking for the best managers for these types of funds for their high-net-worth clients.”
The fund will invest in a variety of stocks, albeit with overlap.
“There is no such thing as an infrastructure peer group,” Mr. Arnott said. “Sometimes it will overlap with utilities, timber or natural resources.”
But advisers already may have another fund doing the same thing.
“You can get very similar exposure in funds we are already using, such as utilities,” said Michael Kalscheur, senior financial consultant with Castle Wealth Advisors LLC of Indianapolis, which has $100 million in assets under advisement.
One adviser said to buy domestic.
“I think infrastructure is going to be the strong factor in getting us out of this economic slump,” said Joseph Alexopolous, founder and principal of Aequitas Wealth Management LLC of Los Angeles, which has $23 million in assets under management.
Alpine Woods Capital Investors LLC, the Purchase, N.Y.-based parent company of the Alpine Funds, launched the Alpine Global Infrastructure Fund (AIFRX) in November.
The multicap-global-stock fund will invest in a broad range of stocks. including companies that own infrastructure, utility companies, communications and construction companies, said Josh Duitz, portfolio manager for the fund.
Investments will likely include a mix of 30% U.S. and 70% international stocks. Emerging markets will be represented by 5% to 10% of the international portfolio.
E-mail Sue Asci at [email protected].
