Infrastructure companies — like energy pipelines and electrical utilities — have earned a reputation as reliable generators of cash flow and steady dividend payers. But in recent years, this industry-diversified segment of the equities market has also become a growth play in addition to its traditional defensive role.
“Global infrastructure spending is steadily rising as countries race to modernize aging assets, decarbonize energy systems and support the explosive growth of digital technologies,” Kevin McSweeney, senior vice-president, portfolio manager at CI Global Asset Management (GAM) said. His portfolio manager responsibilities include the exchange-traded CI Global Infrastructure Private Pool, which has outperformed its peer group over multi-year periods.
“In many cases, infrastructure spending is on the front line of growth trends driving global equities today,” McSweeney said. Among the $425-million ETF’s recent top five holdings is California-based Equinix Inc., a leading provider of digital infrastructure.
Amid positive secular trends such as the rise of AI and energy-hungry data centres, infrastructure stocks as a whole remain modestly priced in relation to historical levels, according to CI GAM.
Historically, infrastructure stocks have typically traded at a premium to global equities as a whole, McSweeney said, but this relationship has reversed. At the end of January, he noted, the MSCI World Core Infrastructure Index had a price-earnings ratio of 21 times, compared with the MSCI World Index’s 23.4 multiple.
“Infrastructure assets have historically delivered attractive risk-adjusted returns,” he said, “and current valuations present an unusually attractive entry point for investors seeking exposure to long-duration, cash-generative assets.”
Canadian ETF options
There are 16 Canadian-listed infrastructure funds available in ETF form currently, with combined assets of about $2.7 billion. The largest is the $1.1-billion iShares Global Infrastructure Index ETF, one of several passively managed offerings.
Infrastructure is a business segment that keeps growing under different economic conditions, according to Massimo Bonansinga, portfolio manager of the $250-million BMO Global Infrastructure Fund. The mutual fund’s purchase options include an ETF series launched in June 2023.
When the economy is doing well, he said, more spending is needed on essentials such as power generation and transportation and distribution networks. During slowdowns, governments step up because infrastructure spending is a “preferred vehicle” for stimulating economies.
Bonansinga views two major secular trends that are having a transformational impact on the economy, and by extension on infrastructure. One is the growing reliance on renewable energy and greater electrification. The other is technological innovation, including AI applications, fuelling demand for the infrastructure that they require.
“We have got growth rates that, for example in utilities, are approaching now more than 10% earnings-per-share growth per year,” Bonansinga said. “That is absolutely outstanding. I’ve been covering this sector for 20 years-plus. And I’ve never seen anything like that.”
To avoid being overly exposed to high-tech-related infrastructure, Bonansinga doesn’t invest directly in data centres. Instead, he holds shares of utilities that provide energy and transmission services that the centres require.
A current BMO holding that exemplifies this approach is Florida-based NextEra Energy Inc., a major electricity provider which in December announced a significant expansion of its collaboration with Google Cloud to develop multiple new data centres.
U.S.-based companies are generally the largest geographic allocation in infrastructure funds, reflecting the country’s dominant global weighting. For instance, the $461-million BMO Global Infrastructure Index ETF recently held 69% of its assets in U.S. stocks.
Tracking a different index, the U.S. weighting in the iShares Global Infrastructure Index was still a substantial 43%.
A balancing act
For active managers, investing in infrastructure becomes a balancing act between traditional, stable dividend payers and newer growth opportunities. “Our portfolio managers are looking for the best balance of traditional and new types of infrastructure,” Chris Cullen, senior vice-president and head of ETFs with Toronto-based Brompton Funds Ltd. said. “And they’re looking for the best return opportunities on a risk-adjusted basis.”
The $54-million Brompton Global Infrastructure ETF, which has received the top five-star Morningstar Rating for its risk-adjusted past performance, recently held 43% in industrials, 20% in energy and 12% in utilities.
However, as with other active managers, these weightings will vary. “There’s not a specific targeting of sectors,” Cullen said. “Sector allocations do tend to fall out of their best ideas in their security-selection process.”
While stocks belonging to infrastructure indices play a dominant role, there’s scope for active managers to think outside the box. For example, a recent top Brompton holding is the Canadian uranium miner Cameco Corp., which supplies nuclear power plants.
“Nuclear power has been a big theme in terms of rollout of AI and of other technology-related infrastructure,” Cullen said.
For income-oriented equity investors, another attractive characteristic of infrastructure funds is above-average dividend payouts. The Brompton ETF, as of the end of January, was yielding 5.4%, bolstered in part by selective covered-call writing.
“There are lots of dividend opportunities available in infrastructure,” Cullen said, “and dividend investors are very well served to look at this area as a means to generate dividend cash flows.”
The $425-million CI Global Infrastructure Fund, for another, pays a monthly distribution of 6.9 cents a share, which at its recent net asset value works out to an annual yield of 2.6%. That’s still double the distribution yield of a global equity index ETF.
McSweeney said infrastructure companies that provide essential services benefit from high barriers to entry and generate revenues typically supported by regulated pricing or long-term contracts.
This creates predictable cash flows and minimizes earnings volatility, he added. “This combination of resilient demand, visibility into future cash generation and recurring income from contractual rents allows many infrastructure companies to sustain higher than average dividend payouts while offering reliable dividend growth over time.”
McSweeney said pipelines and utilities “are benefiting from rising power demand, firm pricing and future growth tied to accelerating AI adoption.”