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The iShares Global Infrastructure ETF (NASDAQ:IGF) has a lot of very solid companies with attractive end markets and economics that are reliable. Many interesting companies that we’ve looked at in the past are part of IGF. However, we think that there are problems on the valuation side, specifically when comparing with fixed income. Bonds are ultimately safer, and when earnings yields aren’t diverged enough from bonds we begin to worry about whether capital is well allocated here.

IGF Breakdown

Toll road economics are a useful way to avoid some of the risks associated with a recession, which although staved away by sizzling unemployment numbers, could come soon regardless. IGF does provide those exposures.

Some names we recognize are Transurban Group (OTCPK:TRAUF) which is a literal toll road company, and also some other special situation names like Atlantia (OTCPK:ATASF). Atlantia sold its concession for the Italian motorway at a good valuation recently. It was mired in controversy over the fact that Atlantia operated the concession which included the Ponte Morandi in Genoa, which collapsed and killed many people. Politicians had been calling for a revocation of the concession, and there was even the risk that it would be appropriated. Ultimately they sold it for a good multiple that justifies their current valuation on a DCF basis. Other regulated utilities can also be found here like Duke Energy (DUK) as well as renewable energy utilities, and in general the end-markets are strong with electricity being essential. Pipeline companies are included too.

Our Concern

Our concern with IGF is only really one concern, which is the valuation. The ETF trades at a 20x PE multiple, which implies a 5% earnings yield. Reference risk free rates are climbing and supposed to reach about 2% if not higher as unemployment continues to shrink. That’s a spread of at most 3% for the risk premium. Our concern is that there are fixed income instruments out there that yield close to as much as 5% in similar businesses.

For example, you can buy debt in Enbridge (ENB) that will yield upwards of 3.5%. Obviously, the risk on debt is meaningfully lower than that of equity. Other resource-heavy companies exist that offer pretty good yields on debt as well. Other high rated debt can be invested in with Duke Energy for example, also yielding towards 4%.

Yes it’s true that debt suffers from duration risk in a rate hiking environment, but ultimately the ability for the businesses to increase their cash flows is also limited, and effectively exposes the equity to similar risks where earnings aren’t really flexible in an inflationary environment. While fixed costs do help, the pricing regimes for infrastructure tends to also be quite stable, especially in regulated utilities.

There is still a case for IGF. It is ahead of the risk free rate, and is higher yielding than the debt, but the problem is that it’s not by much. Overall, we think that fixed income instruments should be considered by investors who are looking at ETFs with infrastructure economics. The economics of infrastructure and the cash flows from debt aren’t all that different, and investors should weigh these options carefully.

While we don’t often do macroeconomic opinions, we do occasionally on our marketplace service here on Seeking Alpha, The Value Lab. We focus on long-only value ideas, where we try to find international mispriced equities and target a portfolio yield of about 4%. We’ve done really well for ourselves over the last 5 years, but it took getting our hands dirty in international markets. If you are a value-investor, serious about protecting your wealth, us at the Value Lab might be of inspiration. Give our no-strings-attached free trial a try to see if it’s for you.


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