The Great Global Building Boom

Investors are waking up to the sound of jackhammers worldwide. In the next 20 years, the tab to build and maintain roads and bridges, and to create and maintain systems that deliver electricity, water, sanitation and telecom services, will swell to $30 trillion. Rich countries must upgrade decades-old infrastructure, and developing nations must build it to make their economies competitive.

Infrastructure investments can provide dependable returns. Consider the Chicago Skyway Toll Bridge System, now managed by a private Australian and Spanish consortium that collects $3 each time a car uses the 7.8-mile span. Says Arthur Simonson, managing director of Standard & Poor's utilities and infrastructure rating group: "These types of assets generate very steady cash flows. They're bond-like." Ernst & Young figures that as much as $240 billion to $360 billion a year in private investments could be used to finance infrastructure projects worldwide.

Most of what passes for investment in infrastructure still doesn't fit into this category of public-private partnerships. Especially in the U.S., few PPP projects exist, or, like the Chicago Skyway, they're managed by foreign interests. But with so much money needed and so much work to do, you should soon find more domestic investment opportunities like those in Europe, Asia and Latin America.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Broad definition. To understand what's meant by infrastructure investing, start with Standard & Poor's Global Infrastructure index. This benchmark breaks the category of companies into three clusters: energy, transportation and utilities. Utilities make up about 40% of the index, the top holding being German energy giant E.On AG. Among the 17% allotted to energy com­panies, El Paso Corp. (symbol EP), a U.S. company that owns North America's largest interstate natural-gas pipeline system, is typical. The 43% in transportation includes a classic PPP company, Spain's Abertis Infraestructuras, which manages toll roads in Europe and South America as well as airports, parking garages, and TV and radio transmission networks.

Most infrastructure funds and indexes have a global spin. While the PPP market is about 15 years old in Europe and Australia, it's relatively new and undeveloped in the U.S., says S&P's Simonson. American private-equity companies and pension funds generally didn't get into PPP investing until five years ago. Small U.S. investors have had access to U.S.-listed securities involved in PPPs for only a couple of years. Basically, Americans aren't wild about rich investors profiting from ports, bridges and roads built with tolls and taxes. But Aaron Visse, co-manager of Kensington Global Infrastructure (KGIAX; 5.75% sales charge), believes this will change: "A lot of politicians don't have the will or the ability to raise taxes. The public sector is going to have to look to the private sector."

Investing in infrastructure makes sense if you want stability and diversification. Most projects resist the ups and downs of economic cycles. The safest route is through funds, and given that much of the action in infrastructure is overseas, funds are the practical way to invest in companies such as Spain's Abertis.

Unfortunately, the pickings are slim. The Kensington fund levies a hefty sales charge. But a new exchange-traded fund, iShares S&P Global Infrastructure Index (IGF), tracks S&P's infrastructure index and is as well balanced a slice of stocks as we can find. If the fund had existed before December of last year and faithfully tracked the index, its one-, three- and five-year annualized returns would have been 20%, 21% and 23%, respectively. The fund yields a healthy 4%.

Another ETF is tied to a known name in global infrastructure investing. Macquarie is a big Australian investment bank that offers a host of infrastructure securities and has its own infrastructure index, the Macquarie Global Infrastructure 100. The index is almost 90% utilities, so you won't get a truly diversified slice of the sector with the ETF that tracks it, SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII).

But Macquarie offers a better option for you. Macquarie Infrastructure Co. (MIC) invests entirely in U.S. assets, including airplane servicing (such as refueling and de-icing) at 66 airports, parking lots at 20 airports and natural-gas distribution. From the time Macquarie went public in December 2004 through mid January, the stock generated an annualized total return of nearly 13%. At $36, it yields 6.8%. (For details, see Boring Businesses but a Terrific Yield.)

Houston-based El Paso may be well known for its natural-gas exploration and production, but its pipeline network is an asset that keeps appreciating. Analysts at Credit Suisse believe the pipeline's unrecognized value is one reason that El Paso's shares are 40% cheaper on a price-earnings basis than the shares of bigger energy companies. The stock, at $18 in mid January, trades at 16 times estimated 2008 earnings of $1.14 a share.

The drip, drip, drip of leaky pipes is music to the ears of Mueller Water Products (MWA). Big cities like New York have a leakage rate of 20%, says Morningstar analyst Adam Fleck. Mueller is a low-cost manufacturer of high-quality pipes, valves and even fire hydrants. But it also supplies residential water systems, and since home building has been in the tank, sales and profits have dropped. So has its stock price, down from $19 last summer to $8. But once housing revives and construction crews get back to work, Mueller could be a big winner.