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Macquarie Makes Global Infrastructure Mark

Sam Patel

Over the past few years, many fortunes have been made -- and lost -- through "hot" investment themes such as technology, real estate and commodities. The Macquarie Group of Australia has built its reputation in an arena that is much less glamorous but offers returns that are equally enticing: global infrastructure.

One way U.S. investors can gain exposure to the dividend and capital appreciation offered by this sector is through (MGU Quote) Macquarie Global Infrastructure Total Return, a closed-end fund.

The fund, which was launched in August 2005 and is rated B+ by TheStreet.com Ratings, has returned 42.78% year to date through Nov. 28.

For investors who are bearish on the U.S. economy, Macquarie Global Infrastructure provides two kinds of defensive plays: the steady income of utilities, combined with exposure to foreign markets, including some that are expanding rapidly. While the bulk of the fund's holdings are in the U.S., the U.K., Australia and Canada, it is also invested in India and China.

The fund's prospectus defines infrastructure and utility assets as "underlying foundations of basic services, facilities and institutions upon which the growth and development of a community depends." This description reinforces the defensive nature of such investments and highlights their bondlike characteristics, such as the regular streams of income these assets produce through mechanisms such as tolls. By sector, 31.87% of assets are in electric utilities or infrastructure, 12.79% in water, 10% in engineering and construction, 8.55% in commercial services, 6.97% in gas and 5.23% in investment companies.

The top three holdings are Canada's Pembina Pipeline Income Pifu, Transurban Group TSL and (MMP Quote)Magellan Midstream Par.

Macquarie Global Infrastructure paid out 38 cents a share in distributions last year and has paid out $1.17 through Nov. 38 of this year. To date, all of the distributions have been dividends; the fund has not yet declared any capital gains distributions. To get a rough idea of what the fund can yield, we divide the year-to-date distribution of $1.17 by the fund's current price of $27.18 and arrive at a 4.3%. By way of comparison, the average yield on the assets in the fund's portfolio is a healthy 6.26%.

The fund's expense ratio of 3.68 ratio is high, but this is to be expected with global funds that typically have a higher cost structure than domestic focused funds. And so far, the returns have more than made up for it.

Macquarie Global Infrastructure's low turnover of 12.17 makes it well suited for the buy-and-hold investors who want long-term exposure to utilities.

As of Nov. 28, it was trading at an attractive discount of 5.85% to its net asset value of $28.36.

One potential risk is that the fund's holdings are fairly concentrated: 55% of assets are in the top 10 holdings. This means that its performance is more vulnerable to the fortunes of a few individual stocks.

And like many closed-end funds, Macquarie Global Infrastructure invests with borrowed money. It has a commercial-paper conduit in place that allows it to raise money to purchase more stock than it could with money from shareholders. Taking this borrowed money into account, it has 130.9% of assets in stocks.