Global Infrastructure Investing: A Different Spin on Emerging-Market Growth

When it comes to infrastructure investing, operators should get as much love as builders.

Investors looking to capitalize on developing markets might dig deeper than the heavy-equipment and construction giants that break ground and erect the bridges, stadiums, apartment buildings, and hospitals that a growing middle class will use.

In fact, it’s the next tier of infrastructure support—the operators of these projects—that may hold the best long-term opportunities for investors. Think toll road managers, gas pipelines, and utilities.

“It’s a play on the same theme—urbanization and rising standards of living—but it’s not just about providing the bulldozer, it’s about collecting 20, 30, 100 years of toll concessions,” says Bob Becker, co-manager of the Cohen & Steers Global Infrastructure Fund.

In addition to benefiting from new projects in emerging markets, this category is positioned to capitalize on infrastructure upgrades in North America and Western Europe, plus Japan and other developed areas of Asia. As developed nations work to whittle down debt and many are tightening spending with aggressive austerity policies, the typically government-funded airport upgrades and bridge repairs will fall to the private sector, says Becker.

As for the developing world, emerging markets throughout Africa, Asia, the Middle East, and South America are overwhelmingly the ones pulling out their checkbooks, officials at GE said at the conglomerate’s March investor conference. GE and rivals are looking to take advantage of global infrastructure, with GE’s spending plans totaling $4 trillion over the next two to 20 years (a figure provided by the company). A number of projects are expected in Brazil, including the PAC 2 investment program totaling $872 billion, the Petrobras Oil & Gas project of $225 billion, and infrastructure spending for the 2014 World Cup and 2016 Olympics estimated at $668 billion, GE management said at the meeting, according to a company release.

Frank Holmes, CEO and chief investment officer for U.S. Global Investors, cites BCA Research Inc. data that shows the growth rate of China’s infrastructure investments is expected to pick up in the second half of the year, as the government is accelerating approvals for railways, highways, and water systems projects.

“This move, to a certain extent, will offset the slowdown in property investments. As a result, it should positively impact materials and commodity and bank lending,” said Holmes, in a blog entry on his firm’s website.

That backdrop is favorable to the goals of the Cohen & Steers Global Infrastructure Fund and similar funds in its category. Becker’s fund has the bulk of its assets in the United States, France, and Japan and includes Brazil projects. The toll road, port and pipeline operators, cell tower owners, railroads, and utilities in the fund tend to have limited competition given high barriers to entry, says Becker. These companies boast solid cash flow, and their shares come with low beta. That means less volatility (on the downside and the upside) than the broader “infrastructure” category and the broader stock market. Many holdings include capital growth potential and pay a dividend.

It’s true that companies like heavy-machinery maker Caterpillar (ticker: CAT) and Fluor Corp. (FLR), whose business extends from chemicals, construction, and mining to alternative energy, stand to benefit in the long term from emerging-market growth as well, Becker says. The difference? They’re cyclical stocks and carry higher betas.

For potential stability, individual investors need only look at where some of the institutional money (think pension and insurance funds) is flowing.
The Canada Pension Plan Investment Board (CPPIB) announced in April that it was taking significant minority stakes in five Chilean toll roads.

Andre Bourbonnais, senior vice president of private investments for CPPIB, said in a company statement: “The addition of these five major urban toll roads in Chile is an excellent opportunity to expand our infrastructure portfolio in a developing market. Chile’s strong economic growth prospects and its stable legal and regulatory framework make it an attractive country for investors like CPPIB. As a long-term investor, we seek infrastructure assets that will deliver stable returns over a prolonged period.”

Investors considering the infrastructure play might also think about the technology behind such growth. For instance, Itron (ITRI) helps utilities with meters and other services and is expanding in the smart-grid arena.

The bottom line for investors: When looking around the emerging globe for ideas, think beyond the development stage to the resources, technology, and manpower necessary to sustain such projects for years to come.