Infrastructure often appears in the news, and should it get new funding or other catalyst, might well be a boon (or boom?) for many different types of companies.
In a bid to clarify the world of infrastructure, Miller/Howard Investments created an infographic showing the key elements (Miller/Howard is a Woodstock, New York-based firm that believes “financially strong companies with rising dividends offer the most consistent performance, as well as the highest added value”).
This image shows the top half of the map:
The objective of this portion of the infographic is to lay out the five major segments within which infrastructure works. Generally, public discussion revolves around transportation and the goal of new or better roads and railroads.
But, as the graphic map makes clear, infrastructure has four other important facets: utilities, global communications, energy and infrastructure enablers.
The bottom half drills down in greater detail, providing sources for data in the charts:
The full map is available here.
Miller/Howard itself currently manages two mutual funds:
- Miller/Howard Income-Equity Fund (MHIEX)
- Miller/Howard Drill Bit to Burner Tip® Fund (DBBEX)
Its strategies emphasize infrastructure, and it refers to three "highlights" (moats, of a sort) of infrastructure on its website:
- Provides essential services in modern economic and social development. Without the growth of infrastructure, there can be no sustainable growth of the global economy.
- Demand is inelastic, meaning demand remains relatively constant, regardless of economic conditions.
- Income: Infrastructure investments resemble, to some extent, bonds. This means they can provide visible and stable income over the long-term.
In its fourth-quarter 2017 report, the firm highlighted the leaders and laggards in its infrastructure portfolio.
Leaders, based on their contribution to returns, were:
- Qualcomm (QCOM, Financial), which turned in better-than-expected results and rebuffed an unsolicited takeover offer from Broadcom (AVGO).
- Marathon Petroleum (MPC, Financial): an $8.1 billion asset dropdown.
- Vodafone (VOD, Financial), which bettered its operating results and raised its guidance.
- Akamai (AKAM, Financial): Revenue grew 11%, and an activist fund revealed a 6.5% stake.
- Verizon (VZ, Financial): Better-than-expected revenue and wireless subscriber growth; laid out 5G plans.
Laggards, based on contributions to returns, included:
- Macquarrie Infrastructure (ASX:MQG, Financial): earnings per share lower than expected; slower dividend growth expected.
- Pattern Energy (PEGI, Financial), which underdelivered on revenue because of wind conditions, affected potential GRID outage in Puerto Rico.
- Enbridge (EEQ, Financial) reduced dividend growth guidance and equity issuance to fund capex.
- OGE Energy-CenterPoint (OGE, Financial) decided to maintain its position in Enable Midstream (ENBL).
- ARRIS International (ARRS, Financial) completed its acquisition of Ruckus Wireless and expects accretion in 2018, but there is concern about higher DRAM prices.
Miller/Howard had a “pure” mutual fund based on infrastructure holdings. Until September 2016, it was the Miller/Infrastructure Fund (FLRUX). At that time, Miller/Howard resigned as a subadvisor and since then it has been the Meeder Conservative Allocation Fund, with the same symbol.
Morningstar offers this chart showing FLRUX (blue line), the industry average (orange) and the Morningstar Moderate Target Risk (green):
Its trailing total returns are:
- One-year: 5.52% (no Miller/Howard involvement)
- Five-year: 6.83%
- 10-year: 4.64%
- 15-year: 8.80%
In its most recent Form ADV (filed March 31, 2017) ,the firm reported $6.4 billion of assets under management. GuruFocus reports Miller/Howard had $4.6 billion in equities as of Jan. 26; that included 181 equity holdings. The firm’s GuruFocus profile can be found here.
Getting back to infrastructure in general, Investopedia reports various investment vehicles exist, including:
- Dedicated infrastructure funds, as well as multi-asset funds with a high proportion of infrastructure stocks.
- Open-end and closed-end mutual funds. These include index funds and exchange-traded funds (ETFs).
- Some ETFs track or use the S&P Global Infrastructure Index as a benchmark.
- Emerging market infrastructure stocks and funds; riskier, but with high potential returns.
Investopedia also observes there are risks inherent in infrastructure, which can be broken down into two types:
- Asset-specific risks involved in the design, construction and operation of these assets. For example, partially-completed bridges that fail or have serious design flaws and must be rebuilt.
- The second type of infrastructure risk refers to the asset class; for example, an increase in interest rates could hurt the profitability, or even viability, of a project.
Despite the risks, a solid, well-managed infrastructure stock or fund has the capacity to deliver long-term results. That longevity makes them popular with institutional investors such as pension funds, which must take care of their participants for decades. In turn, their long-time commitment should make their companies and funds relatively stable for the long term as well.
For investors who want to look further into infrastructure companies, Infrastructure Investor provides a list of the top 100 companies (both private and publicly traded). These are first 10 on the list, based on size:
- Macquarrie Group
- Brookfield Asset Management (BIP)
- Global Infrastructure Partners (GIP)
- IFM Investors
- Colonial First State Global Asset Management
- BlackRock Inc. (BLK)
- EIG Global Energy Partners (EIG)
- Energy Capital Partners
- KKR (KKR)
- Antin Infrastructure Partners
Given the variety of investing choices, value investors can afford to shop around for, as Warren Buffett (Trades, Portfolio) says, great companies at great prices. In many cases, the long-term cash flow may be baked into the project or company, particularly in the case of private-public partnerships where government either contracts for the completed facilities or uses tolls to pay off the project’s cost.
Conclusion
Infrastructure is certainly a high interest topic in the news, but whether that evolves into actual dollars and new projects is another question. While governments may talk about potentially big steps, the private sector continues to invest in this sector.
While there are some risks associated with infrastructure investing, on the whole it offers reasonable opportunities with modest uncertainty. In addition, since most infrastructure plays are oriented to the long term, uncertainty should decrease over time.
That investment does not just go into roads and bridges; as noted, there are four additional facets to infrastructure: utilities, global communications, energy and infrastructure enablers. Actual investing can take place through several categories, including stocks, mutual funds and ETFs.
Disclosure: I do not own shares in any of the stocks listed, and do not expect to buy any in the next 72 hours.
