Mutual Fund Education

A Long-Term Perspective on Infrastructure Funds

David Dierking Jun 13, 2017

One of President Donald Trump’s campaign promises was to commit up to $1 trillion toward rebuilding the nation’s infrastructure. In addition to building a wall along the Mexico border, Trump’s plan also calls for improvements to roads, bridges, buildings, airports and railways.

Not surprisingly, it would be interesting to know how this potential spending boom could impact the sector so that investors can plan their investing strategy accordingly. This article seeks to address this topic.

The Trump Infrastructure Plan

In order to be given consideration by the administration, proposed infrastructure projects are expected to meet initial criteria that can be broadly classified as the following:

• Addresses a national security or public-safety need.
• Makes the United States more self-reliant.
• Provides jobs for American workers.
• Is already in development and nearing implementation.

The Trump team has assembled a list of roughly 300 projects with around 50 already being evaluated. Freeway repair and mass transit development projects are some of the most common items on the list. The initial outlay for approved projects is expected to be around $150 billion.

How Should Investors Approach It?

There are a number of different segments of the economy that should benefit from these investments.

• Materials – Companies are going to need a great deal of natural resources in order to build and repair. Steel producers and miners of iron ore and other materials should experience strong, sustainable demand for their products.
• Industrials – These companies produce the goods and services related to construction and manufacturing. Heavy equipment, machinery and tools will all be essential as these projects progress.
• Energy and Utilities – These companies not only produce essential services, they are heavy cash-flow generators and often maintain monopolistic power.

Investors can target funds that focus solely on these specific industries or look to broader infrastructure funds that target specific companies which are best positioned.

In case if you are wondering whether mutual funds are right for you at all, you should read about why mutual funds, in general, should be a part of your portfolio.

The Risks of Infrastructure Investment

While a trillion-dollar investment bodes well for the industry as a whole, investors should watch out for roadblocks that can impact the return on any investment.

• Regulatory risks – Most of these projects go through a lengthy approval process that can cause delays. Even when approved, issues such as production setbacks and legal hassles can impact timelines and revenues.
• Energy costs – Commodity prices can influence not only how much the project will cost, but also for what price the materials produced can be sold. For example, a drop in the price of iron ore can decrease the overall cost of any project, such as the border wall, that requires steel to manufacture, thereby, potentially saving taxpayers’ money.
• Interest rate risks – The utilities sector, in particular, is very interest-rate sensitive, and changes to rates can affect the value of long-term cash flows.
• Currency risk – Most companies impacted by Trump’s infrastructure plan are multi-national. Exchange rate risk can pose problems if a good chunk of revenue is generated from overseas operations.

Infrastructure Mutual Fund Options

There are several mutual funds available that are focused on infrastructure-related businesses; although, most of the assets are concentrated among just a few major players.

The Deutsche Global Infrastructure Fund (TOLLX) owns about 60 names in its portfolio and includes utilities, pipeline operators, toll road operators, owners of ports and other key pieces of the telecommunications market. The Lazard Global Listed Infrastructure Portfolio (GLFOX) is a bit more concentrated and focuses on utilities, pipelines, toll road and airport operators, railroads, ports, telecommunications and other infrastructure companies. Combined, the two funds manage around $8 billion in assets.

The Bottom Line

Stocks in these economic areas proved popular post-election as investors looked for ways to benefit from Trump’s pro-growth, pro-infrastructure agenda. They’re not the slam dunk that some investors believe they are since many of these projects still need to be approved and followed through to completion. Further delays could impact timelines as well, but sectors that could potentially enjoy a trillion-dollar investment make for intriguing opportunities.

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