Can new bridges and roads help move your portfolio?

DARCY KEITH
Wednesday, February 25, 2009

Governments are counting on massive infrastructure spending to pave the way to better economic times. All those billions of dollars earmarked for new bridges, roads and transit systems also present an opportunity to help stimulate the returns of your RRSP.

Construction, engineering, water and other companies that are involved in infrastructure projects appear poised to get a lot busier. It makes logical sense, therefore, to start building more exposure to them in your portfolio. The problem is, the choices are not as clear-cut as they seem.

There's no arguing the money flowing into the sector is huge, thanks to the economic rescue packages in Canada, the United States, and in places such as western Europe and China.

According to CIBC World Markets economist Benjamin Tal in Toronto, the global economy is going to see as much as $30-trillion of fresh infrastructure investment in the next 20 years. In the near term, Mr. Tal says $136-billion (U.S.) worth of shovel-ready projects are likely to start within the next two years in the United States, while in Canada, municipalities are targeting about $14-billion worth of infrastructure work in 2009 alone.

STOCKS GAIN MOMENTUM

Not surprisingly, global infrastructure stocks are already gaining ground. Many have already risen about 50 per cent since mid-November. Mr. Tal thinks that, over all, they may be jumping the gun, but when broken down geographically, the Canadian and European stocks have been laggards.

Other than engineering stocks, which are up roughly 40 per cent, Toronto-listed companies involved in industries such as equipment distribution, water purification and construction still appear to have a lot of upside, Mr. Tal says.

"The opportunities are so significant, and demand and supply is so much there, that I think it's a good long-term investment," he says. As a bonus, many infrastructure stocks also have reliable good-sized dividend payouts, he notes.

SOME EXPERTS SKEPTICAL

Because RRSP investments are usually plotted for the long haul, infrastructure holdings would therefore seem like a good fit. But not everybody is ready to jump onto this bandwagon. Michael Ryan, chief investment strategist at UBS Wealth Management in New York, argues that infrastructure spending will only partially offset the sharp deceleration in business activity many of these companies have experienced because of the recession.

Industrial and material stocks will continue to suffer from deteriorating earnings and won't recover to levels seen during the global economic boom earlier this decade, Mr. Ryan said in a recent note to clients.

The U.S. government stimulus package falls far short of the private sector infrastructure spending that was made earlier this decade and most of its effects will be felt over an extended period of time, starting after 2009, he said.

Despite these risks, many financial advisers say they are bullish on the sector. They caution, however, against rushing into these investments, or making them a core holding of your portfolio.

"Infrastructure is part of overall portfolios that I'm designing for clients," says Adrian Mastracci, portfolio manager and president of KCM Wealth Management Inc. in Vancouver.

"But I don't think there's any real hurry to get into these things tomorrow or, say, next month," he says. "I'm perfectly happy buying over a period of time."

A sector that's the latest rage today doesn't necessarily mean it's a wise investment, Mr. Mastracci insists. "Do I buy the headline du jour? No, I try to buy it once the excitement has died down somewhat."

The starting point, he says, is for RRSP investors to determine how infrastructure fits into their overall asset mix and investment objectives. "I would not want to just highlight one area saying, 'That's going to be my saviour, that's the one I'm going to bet the farm on' - I wouldn't do that. As part of an overall, diversified portfolio, yes, it makes a lot of sense."

John DeGoey, of Burgeonvest Securities Ltd. in Toronto, says investors probably would be wise to allocate 10 to 15 per cent of their equity portfolio toward infrastructure, depending on their individual circumstances.

"I personally think it's a good time to buy virtually anything," he says, adding that companies or funds involved in tangible assets, such as steel or other commodities, offer good "buying low" opportunities right now.

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INFRASTRUCTURE: WHERE TO INVEST

There are a number of ways to configure your RRSP to take advantage of the expected boom in infrastructure. Here's a look at some options:

MUTUAL FUNDS

At least two dozen mutual funds target the sector. You can check out such products by searching http://www.globefund.com for funds with the word "infrastructure" in the name.

ETFS

Given their lower management expense ratios, infrastructure-themed exchange traded funds offer cheaper costs but aren't actively managed and simply mirror various indexes in the sector. Most of these trade on U.S. exchanges and are priced in U.S. dollars, so they come with currency risks and exchange fees.

One exception is the Claymore Global Infrastructure ETF, which trades on the Toronto Stock Exchange and tracks the MFC Global Infrastructure Index. It has about one-quarter of its holdings in Canadian-based companies, with a weighting of about 54 per cent in the industrial sector and 42 per cent in energy and utilities. There's also the Claymore S&P Global Water ETF, which tracks companies involved in water utilities and infrastructure.

The broader array of U.S. ETF offerings can target more specific sectors and geographical regions. The SPDR FTSE/Macquarie Global Infrastructure 100 ETF, for example, has 91 per cent of its holdings in utility companies and about 2 per cent in industrials. Another popular fund, the iShares S&P Global Infrastructure Index ETF, has 43 per cent in utilities.

Some analysts argue that ETFs such as these with heavy utility weightings may not benefit as much from infrastructure spending.

They instead recommend funds such as the First Trust ISE Global Engineering & Construction Index Fund, with a 92 per cent exposure to industrials; and PowerShares Dynamic Building & Construction Portfolio ETF, with a 70 per cent exposure to industrials.

There are also ETFs that focus on raw materials used in infrastructure, such as the Market Vectors Steel ETF, which invests in international steel companies.

STOCKS

More advanced investors, or those working with an experienced investment adviser, may want to consider buying individual stocks to target specific areas of infrastructure or global regions. Canadian names to consider include SNC-Lavalin Group Inc., Stantec Inc. and Aecon Group Inc.

John DeGoey, a vice-president with Burgeonvest Securities Ltd. in Toronto, warns against buying infrastructure-themed stocks or funds that are narrowly focused on Canada.

"Canada is a small island unto itself. I think I would want to have global infrastructure in my portfolio," he said.

On the other hand, analysts warn that some ETFs are focused geographically so broadly that they may not benefit from the heavy government spending planned in specific countries such as Canada, the United States and China.

The bottom line: Read the prospectus before making any investment to make sure you're targeting the intended infrastructure play.