As the global economy falters with worries about inflation and rising interest rates, investors are looking at infrastructure stocks with renewed interest.
These slow growth, capital intensive sectors can withstand all weather and economic conditions. While not recession-proof, pipelines and electric utilities, as examples, are recession resistant. We need what they produce in good times and bad as we do groceries, household supplies and prescription drugs.
This makes them particularly attractive as a portfolio anchor. The investments are unlikely to yield large short-term gains, but the companies provide the underlying systems we depend on and grow over time with the economy. The companies tend to be large, well-financed and often regulated. They have high barriers to entry and predictable income streams.
In the current climate it means they can cope with rising interest rates and pass on inflation-linked costs. The steady cash flows mean dividends will continue to flow throughout.
While pipelines, power and water utilities, are still the mainstays of infrastructure exchange traded funds (ETFs), they also include airports, toll roads, cell towers and telecommunications companies. In an age of ecommerce, financial payment systems are now being included.
These investments carry some risks. Many providers are monopolies, or near monopolies so they often involve government oversight directly or through regulators. That means a potential for meddling. China’s government blindsided toll operators and local authorities in 2020 when it suspended tolls on all roads, bridges and tunnels during the onset of the pandemic. About 20 of the companies owning these roads are traded in Hong Kong and fell sharply.
During the 2018 Ontario provincial election, Conservative leader Doug Ford took aim at pay raises for Hydro One. Once elected, Mr. Ford ousted the CEO and board of directors and forced Hydro One to abandon plans to buy a utility in Washington State. Those moves sent the share price tumbling.
Ford’s government also capped the compensation of Hydro One’s chief executive pay at $1.5-million. The political interference made the search to hire a replacement a long one, taking eight months. That CEO, Mark Poweska, has announced he is leaving.
Here’s an update on two infrastructure funds. The share prices of both are virtually unchanged year-to-date, compared with the TSX Composite Index which has fallen 11 per cent.
Background: This ETF was among the first launched by Bank of Montreal in 2009. It is passively managed has $509-million in assets under management (AUM) with 92 per cent of the holdings in Canada and the U.S.
Performance: The ETF has been a steady performer. The shares are flat year-to-date.
The fund has an annualized dividend yield of 3.06% at its recent price and a management expense ratio of 0.61% .
Key Metrics: The ETF has 41 stocks, about one third of which are energy pipelines. Another third are electric utilities and 20 per cent are real estate investment trusts that own such things as cell towers.
ZGI has 46 stocks. After the U.S. (69% of holdings) and Canada (23%) 7% are in the UK.
The largest holding is American Tower (11%), a Boston-based owner of wireless and broadcast communications infrastructure. Next is Canadian pipeline utility Enbridge (10%). Rounding out the top five are Crown Castle International., a U.S. cell tower firm (8%), Canadian pipeline operator TC Energy Corp. (6%) and UK utility National Grid PLC. (6%)
The top five holdings make up 40% of the ETF.
This ETF is a conservative way to invest in Canadian and American firms that form the backbone of the North American economy.
Background:This ETF was launched in 2007 and holds 75 global stocks in the transportation, communication, water, and electricity services sectors. It has $3.5 billion in assets.
Performance: Year-to-date the ETF is down 0.57%.
Key Metrics: This ETF is more globally diverse than the BMO Infrastructure fund with 48% of its holdings in Canada and the US versus 92% for the BMO fund. It also has holdings in Latin America, Europe, Australia and China.
The sector weighting are utilities (43%), transportation (39%), and energy (18%).
The top five holdings are Australia’s Transurban Group which owns and develops toll roads (5.1%), Enbridge (5.0%), Italy’s Atlantia Spa which owns roads and airports including Rome’s Fiumicino (5%), Nextera Energy (4.5%) and a Spanish holding company Aena Sme SA, which owns and operates airports and heliports (4%).
This ETF offers more international exposure. Go with ZGI if you would prefer to stay closer to home.