Institutional investors have done well over the years by diversifying into infrastructure such as pipelines, utilities and transportation facilities. So too have retail investors in global infrastructure equity ETFs, a growing category despite bearish stock markets.
The two ETFs with 10-year track records — the BMO Global Infrastructure Index ETF and the iShares Global Infrastructure Index ETF — have respectable 10-year returns to Sept. 30 of 10.3% and 8.9%, respectively.
More importantly, infrastructure funds have cushioned the blow of this year’s downturn by faring far better than the broad markets. Though not immune to short-term losses, they’re more defensive in nature because of their relatively stable cash flows and dividend payouts.
Common characteristics of many infrastructure stocks are monopolistic positioning, regulated returns, huge barriers to entry, and products and services that are necessary inputs in the global economy, said Kevin McSweeney, portfolio manager with Toronto-based CI Global Asset Management.
Backed by a team of sector analysts and other CI investment professionals, McSweeney manages the exchange-traded CI Global Infrastructure Private Pool, as well as a newer offering, the CI Global Sustainable Infrastructure Fund.
Launched in September, CI’s sustainable ETF seeks to profit from companies that are pursuing decarbonization goals. In doing so, it takes a somewhat broad view of what constitutes infrastructure.
The fund has the flexibility to also invest in engineering and construction firms. “We see them as key participants and beneficiaries of the growth of the decarbonization agenda,” McSweeney said.
The closest competitor to CI’s sustainable ETF is the BMO Brookfield Global Renewables Infrastructure Fund. Launched in February, the BMO ETF’s holdings include companies engaged in wind, solar and other non-carbon power generation, clean-energy technology, and water sustainability.
The year-old Horizons North American Infrastructure Development Index ETF is a pure play on infrastructure creators. Since it invests primarily in builders and designers, this ETF doesn’t meet the holdings criteria for the infrastructure category. Instead, it’s classified as North America equity.
Taking a core-style approach to infrastructure investing, with an emphasis on risk management, is the Franklin ClearBridge Sustainable Global Infrastructure Income Active ETF. It’s managed by a team based in Australia with ClearBridge Investments, an affiliate of Toronto-based Franklin Templeton Canada.
To be considered for the Franklin ETF’s portfolio of 30 to 40 stocks, a company must own hard physical assets that provide an essential service, said David Wahl, a Toronto-based director and senior portfolio specialist with ClearBridge.
ClearBridge also favours companies with regulatory provisions or long-term contracts in place to ensure that shareholders are adequately rewarded, Wahl said. “We’re just looking for that visibility over the company’s ability to generate cash flow.”
Index-style ETFs, including the CI and iShares offerings as well as the Mackenzie Global Infrastructure Index ETF, will always have broad industry representation. Others in the category seek to outperform these passive strategies, not always successfully, since index strategies have done relatively well this year.
The AGFiQ Global Infrastructure ETF employs a factor-based quantitative approach, while the Dynamic Active Global Infrastructure ETF, managed by Dynamic’s equity income team, pursues a strategy of quality at a reasonable price.
Other active stock pickers among infrastructure ETFs are the Middlefield Sustainable Infrastructure Dividend ETF, the NBI Global Real Assets Income ETF, the multi-manager Russell Investments Global Infrastructure Pool, the Starlight Global Infrastructure Fund and the TD Active Global Infrastructure Equity ETF.
Stock selection and the fund’s global reach have contributed to CI Global Infrastructure’s returns, McSweeney said. Canadian content is capped at 20% to differentiate the fund from other CI products whose holdings include infrastructure companies.
Another active CI decision was overweighting energy-related infrastructure stocks.
“Our view this year had been that energy was going to do well,” McSweeney said, citing the lifting of Covid-related restrictions and increased fuel consumption as travel resumed. The war in Ukraine, though unforeseen, also boosted revenues.
CI profited from owning shares in the Canadian pipeline giant Enbridge Inc. But bigger gains were to be had south of the border as energy stocks, including distributors, regained favour in the U.S. One of CI’s winning picks was Williams Companies Inc., based in Oklahoma, whose main business is natural gas processing and distribution. The stock is up about 27% in the first 10 months of this year.
The Franklin ETF takes a more defensive approach. At all times, at least half of its assets must be in regulated companies. “Risk-adjusted returns are paramount to everything we do,” Wahl said. “We’re looking for lower volatility and some sort of income stability as our outcome.”
To that end, the portion of regulated assets rose to more than 80% in the first quarter of 2020. “We didn’t know we were going to have a pandemic of course,” Wahl said, “but we really thought that we were near the end of the business cycle, so we were becoming more and more defensive.”
As of late October of this year, the portion held in regulated assets was in the low 70% range. But that portion was again starting to increase, said Wahl, as the managers reduced their holdings in airports and also began to trim their exposure to toll roads.
Though these “user-pay” types of infrastructure generally have prices set by contracts, profitability will vary depending on traffic volume. “They’re growthier, more leveraged to GDP, and they don’t have as much of an income component,” Wahl said.
The sustainability theme that forms part of the ClearBridge strategy is expressed not through industry exclusions but with environment, social and governance criteria that are integrated in the investment process. Analysts determine ESG scores internally for companies they follow, and external consultants validate or review findings.
ESG scores factor into whether a potential holding meets ClearBridge’s criteria for excess return. Wahl said the ESG score “can go from subtracting 50 basis points from the required return if the policies and procedures and ESG incorporation in the firm is really good, or it can be an additional required return of up to 200 basis points if they have poor ESG scoring.”