Infrastructure funds aren't feeling the love yet

Stocks have lagged amid skepticism about the Trump administration's plan

By John Waggoner

Feb 15, 2018 @ 3:18 pm EST

Photographer: Sean Proctor/Bloom

President Donald J. Trump proposed a $1.5 trillion infrastructure program Monday, which may be one of the worst reasons to buy an infrastructure fund. But there are plenty of other reasons to go down that road — eventually.

The infrastructure proposal unveiled Monday has three serious flaws: First, it's not really a $1.5 trillion plan. The federal government plans on spending $200 billion over 10 years, and half that money would be used to attract contributions from state, local and private sources. The plan would also sell off some assets, such as airports, to raise money.

Another problem is that the infrastructure proposal, like any presidential proposal, is unlikely to pass in its original form. Moody's Analytics' baseline assumptions for this year don't include an infrastructure bill for precisely that reason. Even if the infrastructure bill were passed, the immediate effects would be muted, Moody's said.

"Passage of an infrastructure plan would likely lead to an increase in project financings and public debt issuance," said Kurt Krummenacker, a senior vice president at Moody's Investors Service. "The impact would be modest in the next one to two years, however, given the challenges of enacting bipartisan legislation, defining revenue sources to service incremental debt, and the numerous planning and development requirements of launching new infrastructure projects."

Finally, counting on states to raise 80% or more of the new money for the plan could be a stretch, especially since the new tax law reduced the deductibility of state taxes. High-tax states, such as California and New York, already spend a lot on infrastructure, and raising money to pay for new projects could be difficult.

Nevertheless, you don't have to run over a pothole the size of a Volkswagen to know that the nation's infrastructure could use some work. The American Society of Civil Engineers, for example, notes that 56,007 of the nation's 614,387 bridges are structurally deficient. Most locks and dams on U.S. waterways are well past their 50-year lifespans, and the country needs about $80 billion in work on its levees, which protect 300 colleges and universities, 30 professional sports venues, 100 breweries, and an estimated $1.3 trillion in property.

And we're not alone. Complaining about roads, bridges and other infrastructure seems to be a universal human trait. (If you think our roads are bad, try driving in Tanzania.) China alone is expected to need $28 trillion in infrastructure investment, which is more than half of Asia's total needs and 30% of global needs, according to the World Bank. The United States is forecast to have the largest infrastructure investment gap — the difference between investment needs and current trends in investment — of $3.8 trillion, double the next largest, which is China's at $1.9 trillion, followed by Brazil at $1.1 trillion and Russia at $700 million.

Most of the world's current needs are for roads and electricity, the World Bank says. But investors are starting to realize that infrastructure is more than that.

"We think it's a much larger scope — technology, telecom, water and energy independence, too," said Peter Santoro, lead portfolio manager for the Columbia Global Infrastructure Fund (RRIAX). "When we looked at what the Trump plan had for infrastructure demands, we were pleased about how they defined it."

Infrastructure funds gained an average 24.9% last year, according to Morningstar Inc., beating the Standard & Poor's 500's gain of 21.83%. Part of the reason for their outperformance was the fact that most infrastructure funds are global funds, rather than simply U.S. funds.

"The U.S. is a big part of what we do, but we think the opportunity is a global opportunity," Mr. Santoro said. The fund has about 45% of its assets in foreign stock, according to Morningstar.

While the opportunity is large overseas, global funds also got a boost from the declining value of the dollar on currency exchanges. The MSCI Europe, Australasia and Far East index gained 12.23% in 2017, but that jumped to a 21.78% gain when translated back into U.S. dollars.

So far this year, the opportunity in global infrastructure has largely been overlooked. The average infrastructure fund is down 4.99% in 2018, versus a 0.47% loss for the S&P 500.

"People are still somewhat skeptical about infrastructure spending," said Ben Phillips, chief investment officer at EventShares. "You had a nice uplift on a lot of these companies in 2016 and 2017, but they were priced on the rumor of infrastructure spending. Now we're waiting for the actual fact.

If you're intrigued by the possibility of increased infrastructure spending, take a close look at a funds' holdings, said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA. If you want to concentrate on U.S. infrastructure spending, consider the Global X U.S. Infrastructure Development ETF (PAVE), which limits its investments to U.S.-based holdings. The largest infrastructure ETF, iShares Global Infrastructure ETF (IGF), is heavily weighted toward industrials, energy and utility stocks.

At least at the moment, Wall Street is taking a skeptical view of the government's infrastructure plans. But that doesn't mean that there's not a long-term infrastructure play. It just means that a revival in infrastructure stocks could still have a long road ahead of it.

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