The recent spike of interest in infrastructure investing has led to a number of new players in that area. One recent entry is the Kensington Global Infrastructure Fund in San Francisco, started up in June of 2007. Aaron Visse is co-manager of the fund, which holds around 60 companies. He spoke with U.S. News. Excerpts:
What's causing the boom in infrastructure investing?
A few noticeable trends that have been going on are underinvestment in infrastructure in developed countries, which has largely been a function of declining discretionary spending and increased nondiscretionary spending, which has been eating into the pie more than ever. At the same time you have globalization going on, and it's made the playing field a little more level among developing countries. I think it puts a real focus on infrastructure as a way for countries to compete best in this new world.
How does the prospect of a recession affect what you do?
We've definitely gotten more cautious on the global economy. We think whether there is a recession or not is anyone's guess, but certainly slowing growth appears to be in the cards, so we're reducing exposure to things like container ports. We've increased exposure to things like toll roads, so we've tried to get a little more defensive.
How does investing in infrastructure domestically compare with the international market?
In America, you have the benefit of investing in markets that you're most familiar with, and there's the level of transparency we're used to. The flipside is that in the developing world, you can often find much better growth rates, but you have to be willing to live with some of the problems in getting the right information and being a little less familiar with the countries.
Infrastructure is pretty much an accepted asset class in Australia, Europe, and Asia. People are now starting to figure that out in the United States. We need more infrastructure spending, the government can't pay for all of it, so you're going to see an increased level of things like public-private partnerships in this country. You're going to see more assets coming into the public markets here, similar to what's happened in other places of the world.
What are some companies you like right now?
We like E.ON, a German utility NYSE:EON.This is a company that has very stable assets in their home market of Germany, but they've expanded across Europe and into Eastern Europe. So they have existing mature infrastructure, but they're also participating in the building of new infrastructure in emerging markets. They're trading at maybe 16 times forward earnings, but it's your typical utility in that we're looking for pretty solid growth—over 2.5 percent yield.
We've liked Hong Kong-listed Chinese toll companies a lot, such as Sichuan Expressway, Shenzhen Expressway, and Zheijang Expressway. Toll roads are generally very stable, recession-resistant assets. They've also tended to be slower growth because most of the toll road assets have been in developed markets like Europe. In China, you have a lot more demand for cars and trucks on the road. [Gross domestic product] is a pretty good predictor of what growth will be like for toll roads. You look at the GDP growth in China—it's supposed to decelerate, but it's still a lot greater than what you would find in Europe.