By contrast, India accounts for less than 1% of the fund. “It’s difficult to find infrastructure investments there that we like,” Duitz says. “The company managers we’ve met with there do not give us confidence that they’ll be able to execute their plans. The same holds true on the government side. If they say they are going to build X, it often turns out that they build just half of X.”
Improving Outlook
Duitz believes that even in the face of slow economic growth both here and abroad, many infrastructure companies in the fund will deliver solid earnings growth in the years to come. Emerging market governments will need to build more roads, bridges, railroads and other facilities as those countries continue to urbanize. Since September of last year, China and Brazil have announced major projects to stimulate the economy and shore up facilities in major cities and the surrounding areas.
For that reason, the KPMG report sees better times this year as the backlog of new projects hit the market and economic conditions improve. Governments have also shown an increased willingness to support infrastructure with regulation and financial backing, the report adds, and that should also help move these projects forward.
In another favorable trend, cash-poor but asset-rich states and municipalities in the U.S. are relying more on the private sector to undertake major projects.
Beyond the macroeconomic picture is the issue of stock prices, which have become more expensive as investors chase infrastructure companies. Duitz views the current prices as reasonable given the stocks’ earnings growth prospects, and believes that with more infrastructure mutual funds and ETFs coming to market, this corner of the investment world “is really just starting to get off the ground.” He says the financial advisors he has spoken with often use the fund as part of their global allocation strategies, or as a high-dividend play in place of utility stocks.
To find names with the best chances for long-term appreciation, Duitz first tries to determine which countries offer the most hospitable environment for infrastructure build-out, and which countries could see their projects stall because of political or economic roadblocks. Price is also an important factor; as a value investor, he often seeks out stocks that investors are ignoring or punishing for what he thinks are temporary setbacks.
At 33% of assets, U.S. companies claim the most dominant geographic stake. One of the trends in the U.S. is to have private companies complete public projects in exchange for accelerated revenue. Duitz believes that this trend offers opportunities for expansion, even in a slow-growth environment. In Texas, for example, the Spanish construction company Ferrovial SA (one of Alpine’s holdings) is spearheading a major highway building project. Eventually, Ferrovial will be rewarded with a share of the toll revenue the highway generates.
The nation’s prison system has also become an increasingly fertile area for these so-called public-private partnerships as more governments decide to hand facilities management over to outside companies. One of Duitz’s holdings is the GEO Group, the largest provider of correctional and detention facility services in the world, which operates 101 such facilities in the U.S., Australia, the U.K. and South Africa. The first real estate investment trust specializing in the corrections facility industry, it trades at a discount to other REITs.
Another U.S. holding is the Williams Companies, which owns 15,000 miles of natural gas pipelines and delivers 14% of the natural gas consumed in this country. Duitz likes the company’s “take or pay” contracts, which obligate gas producers to pay Williams regardless of the amount of gas that moves through the pipelines.
The fund also owns a number of railroad companies, including Brazil’s All America Latina Logistica SA. The largest railroad operator in the country, it transports mainly agricultural products. Given the company’s expected 30% earnings growth next year, it is trading at a discount to U.S. railroads. The stock has become that kind of bargain because investors are worried about the impact of possible government-imposed price caps on transport services. But Duitz believes such concerns are overblown.