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A good time to invest in listed infrastructure

Vishal Bhatia

A good time to invest in listed infrastructure

Executive Summary

Since coming into office, U.S. President Joe Biden has made infrastructure an important part of his plan. Only recently, however, did the U.S. Senate approve the master infrastructure plan (the INVEST in America Act), worth US$550 billion in new spending, and US$1.2 trillion overall for the next five years. The bill will now move on to the House, where it is expected that a vote will occur at some point in October. While talk about the need to invest in infrastructure has been ongoing for many years, bipartisan approval for a concrete plan finally appears to be in the home stretch.

The cash infusion into America’s infrastructure should create opportunities for stocks such as electric utilities, builders of roads and bridges, owners/operators of railroads and cellular towers, and bolster the already robust case to invest in listed infrastructure via a fund like the BMO Global Infrastructure Index ETF (ticker: ZGI).

Institutional investors have long coveted global infrastructure investment for a variety of reasons cited below, but have typically accessed the space via private equity. Listed global infrastructure makes the investment opportunity liquid and accessible to all investors via the equity market.

The following reiterates the reasons for investing in listed infrastructure, and then examines how the Biden plan could impact exposure in the fund, acting as additional fuel for growth and returns in the coming years.


Why invest in global listed infrastructure via the BMO Global Infrastructure Index ETF (ticker: ZGI)?

Essential Assets The listed infrastructure companies in ZGI own and operate many of the physical assets that provide essential services allowing modern society to function and grow. These include such assets as toll roads, communications towers, water purification and distribution infrastructure, electricity transmission and distribution, and oil and gas storage/transportation. The services offered by these assets should remain in demand no matter how the stock market is behaving.

Portfolio Resilience Listed infrastructure has historically delivered attractive income-driven total returns through market cycles due to predictable income and cash flow growth, typically supported by long-term, regulated revenue streams for essential services. ZGI has regularly offered a higher yield than broad global equities, as represented by the MSCI World Index. Currently, the fund has a projected yield of 3.8%, versus MSCI World’s yield of 2.1% (Source: Bloomberg, as of September 24, 2021).

Infrastructure assets often benefit from monopolies and relatively inelastic demand, which explains the predictability and stability of their cash flows. This enhances the ability of such companies to perform well throughout economic cycles. Often, inflation protection is built into many infrastructure assets’ pricing/revenue models, thus allowing investors to obtain a degree of built-in inflation defense.

Strong Portfolio Diversification The sector has historically enhanced portfolio diversification. Correlations to global equities as represented by the MSCI World Index were 0.61 over the last decade ending December 31, 2020 (source: Bloomberg). They can serve as a suitable complement to other global equities or real assets.

Downside Risk Mitigation with Upside Participation Over the past 10 years, listed infrastructure has captured only 30% of the global equity market downside, while capturing more than 60% of the market upside, potentially helping to reduce overall portfolio volatility. (Reference indices – Dow Jones Brookfield Global Infrastructure Total Return Index vs. MSCI World total return, 10 years to December 31, 2020).


Details

BMO Global Infrastructure Index ETF (Ticker: ZGI)

The BMO Global Infrastructure Index ETF specifically provides exposure to owners and operators of ”pure-play” infrastructure companies – that is, they derive at least 70% of their estimated cash flows from pure-play infrastructure assets:

  • Airports - Development, ownership, lease, concession, or management of an airport and related facilities.
  • Toll roads - Development, ownership, lease, concession, or management of a toll road and related facilities.
  • Ports - Development, ownership, lease, concession, or management of a seaport and related facilities
  • Communications - Development, lease, concession, or management of broadcast/mobile towers, satellites, fiber optic/copper (excludes telecom services) cable.
  • Electricity transmission & distribution - Development, ownership, lease, concession, or management of electricity transmission and distribution assets. Excludes generation, exploration, and production of energy products
  • Oil & gas storage & transportation - Development, ownership, lease, concession, or management of oil and gas (and other bulk liquid products) fixed transportation or storage assets and related midstream energy services
  • Water - Development, lease, concession or management of water related infrastructure, including water distribution, waste-water management, and purification/desalination.
  • Diversified Multiples sources of above or investment fund with primary focus towards infrastructure investments.


How ZGI may benefit from the US$550B of new funds from Biden’s Infrastructure Plan

While the government spending bill may have little immediate impact on the cash flows of listed infrastructure companies, it reinforces the growth themes of the asset class and should be supportive over the long run for the entire subsectors that these infrastructure companies belong to.

ZGI invests approximately 70% of its assets in U.S.-based, pure-play infrastructure companies, most of which stand to benefit from government policy and support for remediation and upgrades of U.S. infrastructure. Within ZGI, 25% of its U.S. exposure is in Specialized REITs that own cellphone towers across the U.S., which is expected to see upgrades from the US$65B investment in broadband technology to expand access to high-speed internet access, among other initiatives. Water utilities (6% of ZGI’s U.S. exposure) should see an impact of US$63B. Electric utilities (4% of ZGI’s U.S. exposure) are expected to benefit from another US$65B in upgrades to old power lines and grids.


August 2021 – U.S. infrastructure exposure in ZGI vs. Biden Plan dollars

Focus U.S. Based Weight Biden Plan Dollars Notes
Oil & Gas Storage & Transportation 14.76 US$21B part of remediation of oil wells
Multi-Utilities 11.48 multi-utilities will benefit from electric and water utilities
Water Utilities 5.93 US$63B investments in water pipes in particular
Gas Utilities 4.44 could benefit from investment in broad infrastructure
Electric Utilities 7.80 US$65B upgrades to old power lines and grids
Airport Services 0.00 US$25B no direct exposure to airports in the U.S.
Specialized REITs 25.19 US$65B significant positions in cellphone towers in ZGI's specialized REITs holdings
Marine Ports & Services 0.00 US$17B no direct exposure to ports in the U.S.
Total U.S. Exposure 69.60 Impact up to US$214B

The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

Vishal Bhatia

A good time to invest in listed infrastructure

Executive Summary

Since coming into office, U.S. President Joe Biden has made infrastructure an important part of his plan. Only recently, however, did the U.S. Senate approve the master infrastructure plan (the INVEST in America Act), worth US$550 billion in new spending, and US$1.2 trillion overall for the next five years. The bill will now move on to the House, where it is expected that a vote will occur at some point in October. While talk about the need to invest in infrastructure has been ongoing for many years, bipartisan approval for a concrete plan finally appears to be in the home stretch.

The cash infusion into America’s infrastructure should create opportunities for stocks such as electric utilities, builders of roads and bridges, owners/operators of railroads and cellular towers, and bolster the already robust case to invest in listed infrastructure via a fund like the BMO Global Infrastructure Index ETF (ticker: ZGI).

Institutional investors have long coveted global infrastructure investment for a variety of reasons cited below, but have typically accessed the space via private equity. Listed global infrastructure makes the investment opportunity liquid and accessible to all investors via the equity market.

The following reiterates the reasons for investing in listed infrastructure, and then examines how the Biden plan could impact exposure in the fund, acting as additional fuel for growth and returns in the coming years.


Why invest in global listed infrastructure via the BMO Global Infrastructure Index ETF (ticker: ZGI)?

Essential Assets The listed infrastructure companies in ZGI own and operate many of the physical assets that provide essential services allowing modern society to function and grow. These include such assets as toll roads, communications towers, water purification and distribution infrastructure, electricity transmission and distribution, and oil and gas storage/transportation. The services offered by these assets should remain in demand no matter how the stock market is behaving.

Portfolio Resilience Listed infrastructure has historically delivered attractive income-driven total returns through market cycles due to predictable income and cash flow growth, typically supported by long-term, regulated revenue streams for essential services. ZGI has regularly offered a higher yield than broad global equities, as represented by the MSCI World Index. Currently, the fund has a projected yield of 3.8%, versus MSCI World’s yield of 2.1% (Source: Bloomberg, as of September 24, 2021).

Infrastructure assets often benefit from monopolies and relatively inelastic demand, which explains the predictability and stability of their cash flows. This enhances the ability of such companies to perform well throughout economic cycles. Often, inflation protection is built into many infrastructure assets’ pricing/revenue models, thus allowing investors to obtain a degree of built-in inflation defense.

Strong Portfolio Diversification The sector has historically enhanced portfolio diversification. Correlations to global equities as represented by the MSCI World Index were 0.61 over the last decade ending December 31, 2020 (source: Bloomberg). They can serve as a suitable complement to other global equities or real assets.

Downside Risk Mitigation with Upside Participation Over the past 10 years, listed infrastructure has captured only 30% of the global equity market downside, while capturing more than 60% of the market upside, potentially helping to reduce overall portfolio volatility. (Reference indices – Dow Jones Brookfield Global Infrastructure Total Return Index vs. MSCI World total return, 10 years to December 31, 2020).


Details

BMO Global Infrastructure Index ETF (Ticker: ZGI)

The BMO Global Infrastructure Index ETF specifically provides exposure to owners and operators of ”pure-play” infrastructure companies – that is, they derive at least 70% of their estimated cash flows from pure-play infrastructure assets:

  • Airports - Development, ownership, lease, concession, or management of an airport and related facilities.
  • Toll roads - Development, ownership, lease, concession, or management of a toll road and related facilities.
  • Ports - Development, ownership, lease, concession, or management of a seaport and related facilities
  • Communications - Development, lease, concession, or management of broadcast/mobile towers, satellites, fiber optic/copper (excludes telecom services) cable.
  • Electricity transmission & distribution - Development, ownership, lease, concession, or management of electricity transmission and distribution assets. Excludes generation, exploration, and production of energy products
  • Oil & gas storage & transportation - Development, ownership, lease, concession, or management of oil and gas (and other bulk liquid products) fixed transportation or storage assets and related midstream energy services
  • Water - Development, lease, concession or management of water related infrastructure, including water distribution, waste-water management, and purification/desalination.
  • Diversified Multiples sources of above or investment fund with primary focus towards infrastructure investments.


How ZGI may benefit from the US$550B of new funds from Biden’s Infrastructure Plan

While the government spending bill may have little immediate impact on the cash flows of listed infrastructure companies, it reinforces the growth themes of the asset class and should be supportive over the long run for the entire subsectors that these infrastructure companies belong to.

ZGI invests approximately 70% of its assets in U.S.-based, pure-play infrastructure companies, most of which stand to benefit from government policy and support for remediation and upgrades of U.S. infrastructure. Within ZGI, 25% of its U.S. exposure is in Specialized REITs that own cellphone towers across the U.S., which is expected to see upgrades from the US$65B investment in broadband technology to expand access to high-speed internet access, among other initiatives. Water utilities (6% of ZGI’s U.S. exposure) should see an impact of US$63B. Electric utilities (4% of ZGI’s U.S. exposure) are expected to benefit from another US$65B in upgrades to old power lines and grids.


August 2021 – U.S. infrastructure exposure in ZGI vs. Biden Plan dollars

Focus U.S. Based Weight Biden Plan Dollars Notes
Oil & Gas Storage & Transportation 14.76 US$21B part of remediation of oil wells
Multi-Utilities 11.48 multi-utilities will benefit from electric and water utilities
Water Utilities 5.93 US$63B investments in water pipes in particular
Gas Utilities 4.44 could benefit from investment in broad infrastructure
Electric Utilities 7.80 US$65B upgrades to old power lines and grids
Airport Services 0.00 US$25B no direct exposure to airports in the U.S.
Specialized REITs 25.19 US$65B significant positions in cellphone towers in ZGI's specialized REITs holdings
Marine Ports & Services 0.00 US$17B no direct exposure to ports in the U.S.
Total U.S. Exposure 69.60 Impact up to US$214B

The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

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