It seems that the old market adage “Sell in May & Go Away” is extending itself by a by few weeks or months. Volatility has returned and the stock/bond markets seem to swoon with every new piece of Fed speak or economic data point. Broad based indexes- like the SPDR Dow Jones Industrial Average (NYSE:DIA) have experienced some violent swings as of late. All in all, those gyrations have investors worried and anxiety levels running high.
Luckily, there’s an asset class that can provide steady returns in the face of all this volatility and that's infrastructure.
Toll Roads, Bridges, & Pipelines
While toll-roads, pipelines and sewer treatment plants may not seem like high-growth investments, the truth is that infrastructure remains one of the best ways to volatility-proof wealth. That’s because, the nature of the asset class provides predictable returns. That stability of the sector is key when it comes to both inflation and volatility fighting.
SEE: Trust Utilities
Because infrastructure assets often hold a monopoly on the provision of essential services, payments for the use of certain assets such as a cellular tower or sewer system produce stable cash flows and revenues for their owner/operators. These steady and predictable cash flows ensure that the sector has a low correlation with other asset classes and can support high credit ratings/borrowing costs as compared with other types of assets. More importantly, these cash flows are commonly linked to measures of economic growth, such as gross domestic product and inflation. That feature is a key reason why the asset class is a great inflation fighter.
These predictable cash flows help on the volatility front as well.
By receiving those steady payments, infrastructure as an asset class has managed to avoid much of the ups and downs of the market. According to Russell Investments, infrastructure delivered an annualized volatility much lower than REITs, equities, and commodities futures over the last five years. At the same time, Russell also found that infrastructure has consistently produced lower volatility than the broader equity market since the inception of the asset class’s benchmark- the S&P Global Infrastructure Index.
Given, the sector's low correlation with other asset classes, diversification benefits and predictable income, it’s easy to see why investment bank Mitsubishi UFJ Trust (NYSE:MTU) reports that the number of institutional investors investing in infrastructure assets have jumped to 1,551, up from fewer than 600 in 2009.
Adding Some Exposure
With this summer looking like it will continue to be a volatile one, investors may want to add a dose of infrastructure assets to their portfolio. The easiest way to do that is through the iShares S&P Global Infrastructure Index (NYSE: IGF). The fund tracks previously mentioned benchmark index and holds 76 infrastructure related firms. This includes electric utilities like Duke Energy (NYSE:DUK) and toll-road operators like Atlantia. IGF is very much a global play with 70% of its portfolio located outside the U.S. Overall, the iShares fund has been pretty stable and produces a juicy 3.94% yield. Additionally, the SPDR FTSE/Macquarie Global Infrastructure 100 ETF (NYSE:GII) can be used as a broad play.
The surge in energy activity will not only benefit those firms doing the drilling, but those transporting the fuel as well. For investors, all those pipelines, storage tanks and gathering centers dotting the country could be a great bet. The UBS E-TRACS Alerian MLP Infrastructure ETN (NYSE:MLPI) holds 25 of the largest MLP's related to energy infrastructure sector and currently yields about 4.8%.
Another way to potentially play the infrastructure sector is through the debt issued to build these various projects. These loans typically feature investment grade credit characteristics, yet many can be had at lower spread levels. That provides attractive values and yields for investors. The new Dreyfus Municipal Bond Infrastructure Fund (NYSE:DMB) invests in municipal bonds issued to finance infrastructure sectors and projects in the United States. Dividends received from the fund are expected to be exempt from Federal taxes.
Likewise, Build America Bonds can be used to pay the infrastructure debt angle. While the program was canceled, the long timelines of these bonds have created a robust secondary market. That means, investors shouldn’t worry about holding funds like the PowerShares Build America Bond (NYSE:BAB) or the actively managed PIMCO Build America Bond ETF (Nasdaq:BABZ). Both funds yield, 4.79% and 4.27%, respectively.
The Bottom Line
With the markets returning to their up and down patterns, investors are getting nervous. Luckily, infrastructure assets can help diminish that volatility. Their stable cash flows will help smooth-out a portfolios returns. The preceding picks, along with the Cohen & Steers Infrastructure Fund (NYSE:UTF), make ideal selections in playing the theme.