Infrastructure investing has popped up on more investors' radar in the last few years as the need for building or updating highways, sewers, water systems and so on has become all too apparent.
The numbers involved are staggering, even if inconsistent from report to report.
I found one report saying the U.S.
needs to spend $400 billion, a different report saying India
needs to spend $320 billion and a third item that estimates that the planet
needs to spend $2 trillion annually through 2015.
This stands to benefit companies that do the building, the companies that contract the building, the various distributors of services and a few others segments.
Interestingly, the various groups within infrastructure have a very low correlation to each other. That might make this a less risky sector to overweight than many others are -- if the overweighting is done correctly.
The best way to do this would be to take one name from each of several subgroups within infrastructure.
Here is an example of how to assemble a combination of infrastructure stocks that don't correlate with each other, but all stand to benefit from the trillions to be spent.
The stocks randomly selected from disparate segments within infrastructure as follows;
Zhejiang Expressway , a toll road company in China
ABB , an engineering company in Switzerland
National Grid , which works on electricity transmission and generation in the U.K.
Japan Airport Terminal , airport terminal management and services in Japan
Veolia , all things water in France
There are many other stocks from each segment that could have been studied as well.
The case for investing in toll roads and airport-related stocks is that they capture what is happening on the ground in these countries. The case for the distributors (be it water, electricity or something else) is that people in developed countries pay monthly to have these services, and people in developing countries are willing to pay for the same services. The case for the engineers and builders is that infrastructure must be updated in some countries and built out for the first time in others.
The correlation from subgroup to subgroup within infrastructure is quite low, potentially reducing the chance that bad news for one means lower prices for all.
What is an appropriate allocation to infrastructure?
A year ago the
was 20% financial stocks (actually, it has been around 20% for most of this decade) and most investors who stayed equal-weight or higher had a rough year, because most of the stocks do correlate highly and most went down. With infrastructure, you have a segment that does not correlate, so the risk should be less. Also, capital will be flowing in for years to come.
If 20% for financials with its concentrated risk was OK for so many years, then couldn't 30% in infrastructure with dispersed risk be appropriate?
A big bet for me would be five different stocks, one each from different subgroups, not chosen randomly as was the case for the stocks charted above, each with a 2% weight.
Anyone buying into the theme needs to realize that if it is going to deliver on its promise, it will likely do so over a period of years. I do not think the performance over the next year -- good or bad -- confirms or refutes the thesis.
At the time of publication, Nusbaum had no positions in any of the securities mentioned, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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