S&P’s Global Infrastructure Index is the benchmark for infrastructure funds.  It is a market cap weighted index consisting of 75 holdings, 60 in developed markets and 15 in emerging markets.  S&P targets the index to be 20% energy, 40% transportation, and 40% utilities upon rebalancing.  This index is tracked by Barclay’s iShare ETF IGF, which was introduced in December 2007.

The other infrastructure index is the Macquarie Global Infrastructure Index (MGII), which consists of 100 holdings without any geographical constraints, although all companies come from developed or advanced emerging markets.  It is essentially the 100 largest firms with at least 50% of revenue derived from infrastructure, weighted by market cap based on their weightings in the FTSE Global Equity Series All Cap Index. This index is tracked by the MQ Global Infrastructure Total Return ETF MGU which was introduced in August of 2005.

Four mutual funds offer broad-based infrastructure products, in addition to these two ETFs.

Note: PGUAX recently converted from a utilities fund to an infrastructure fund.
Data obtained from Morningstar, September, 2008

Active versus Passive Management

But even if you’re sold on the idea of a global infrastructure fund, questions remain. For instance, should you go with an actively-managed or an index investment?

First American believes in an active approach that:

• Includes more sectors than the S&P Global Infrastructure Index
• Can anticipate trends forming in the market
• Can avoid pitfalls from geopolitical and regulatory risks

The S&P Global Infrastructure Index is flawed, Rosenberg says, because its sectors and industries are too narrowly construed – it also includes some companies that don’t exhibit infrastructure characteristics (such as those identified above by Pension Consulting Alliance). The First American Global Infrastructure Fund’s universe expands those sectors by investing in airports, logistics, ports, and toll roads in the transportation sector as well as alternative energy and water, electric utilities, pipelines, gas, and waste management in the utilities/energy sector. It also adds social infrastructure industries—prisons, hospitals, and other community facilities— and expands the category of “alternative assets/other” – such as communications towers. First American’s additions are based on whether the industry offers infrastructure’s abovementioned key attributes.

The advantages of adding sectors, described in First American’s Redefining Global Infrastructure white paper, include:

• Exposure to investments that might otherwise be available only to private equity investors
• Exposure to sectors overlooked because of small size or recent emergence
• Less emphasis on sectors, such as electric and integrated utilities, that already have high exposure

As for anticipating trends and reducing geopolitical and regulatory risks, Rosenberg cites his fund’s underweightings in toll roads (5.9% of the fund vs. 18.0% of S&P’s index as of June 30) and airports (5.0% vs. 8.1%), two areas that have suffered during recent economic troubles. He’s investing in ports that emphasize commodities rather than more economically sensitive consumer goods. On the geopolitical front, the First American fund invests in one-third more countries than the index.

Indicative of its strategic underweighting of overexposed sectors, the fund’s electric utilities holdings totaled only 21.5% of the fund vs. 37.1% of the S&P index as of June 30 (although total utility exposure is roughly equal to that of the index), a disparity in weightings that is the single greatest between the fund and the index.

But Evensky is not convinced that First American’s sector weighting will add value.  “Where’s their background knowledge that would tell me that their 10% bet against electric utilities is the right thing?” he asks.

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