News and analysis from Standard & Poor’s MarketScope Advisor

Before the credit crisis hit markets with hurricane force in 2008 and 2009, Wall Street was becoming increasingly enamored with an investment trend that, through the miracle of financial technology, promised investors access to a new and distinct asset class capable of generating strong returns at relatively low risk.

This new asset class was infrastructure–income-generating enterprises such as airports or toll roads–that had historically been municipally owned and funded by government-issued debt. Using a concept developed in Europe and known as the “public-private partnership,” infrastructure assets began to open to private investment. Investors would fund badly needed improvements to these and other public infrastructure assets, such as bridges, hospitals, and university dormitories, in exchange for the right to collect a steady stream of payments that would repay the initial investment as well as provide them with an attractive return.

The idea that this concept could open a vast new world of investable assets with highly dependable revenue streams–together with a steady stream of economic studies declaring that global infrastructure was crumbling and needed trillions of dollars of new investment or economic growth would begin to slow–set off a rush among portfolio managers to create infrastructure investment funds. These funds proved highly attractive to pension funds and institutional investors seeking to lock in long-term rates of return. Inflows to infrastructure funds rose from just $2.4 billion in 2004 to a massive $34.3 billion in 2007, according to data from Probitas Partners, a private equity consultant.

The money flowing to these private infrastructure funds did not go unnoticed by mutual fund sponsors, and they soon responded with funds of their own. Prior to 2007 there were no funds specifically targeting infrastructure, while today there are more than a dozen. Some companies took their lackluster utility funds, rejiggered their portfolios slightly, and renamed them infrastructure funds.

Since that time, however, the credit crisis exposed a previously unappreciated weakness of infrastructure funds: their assets are anything but liquid. With credit concerns now paramount and the financial health of every enterprise in doubt, these funds have lost some of their earlier popularity. The money flowing into infrastructure funds dropped to $10.7 billion in 2009, and Probitas says it is not expected to rebound much in 2010.

Still, there are some reasons for optimism. Most infrastructure funds have rebounded strongly over the past year, and at least one fund manager believes the time is right for a new fund, even though several existing infrastructure mutual funds are languishing with less than $10 million in assets. T. Rowe Price began selling shares in its Global Infrastructure Fund (TRGFX) in February 2010, and collected more than $20 million in assets since then.

There are currently just over a dozen self-designated infrastructure mutual funds, most of which are global in scope. Most of these funds carry an upfront load and charge an annual expense ratio of 1.3% or more. While they all aim to give exposure to infrastructure, no two funds quite see eye-to-eye on just what infrastructure stocks actually are, so it is important to review a fund’s holdings to be certain you are gaining the type of exposure you desire.

The largest, and one of the oldest, of these infrastructure funds is the $2.3 billion Cohen & Steers Infrastructure Fund (CSUAX), which opened for business in May 2004 and changed its name from the Select Utility Fund in January 2010. While its 12-month total return as of June 15, 2010 of 15.84%, according to Lipper data, is not as good as several of its peers, its 6.45% distribution yield as of March, 31, 2010 (the fund pays dividends quarterly) could be attractive to many investors. The fund’s top three holdings, which collectively account for less than 16% of its assets, include two telecom companies, American Tower and satellite operator SES, as well as East Japan Railway.

From a recent performance perspective, a better choice might be the Riversource Recovery Infrastructure Fund (RRIAX), a new relatively new fund that was started in February 2009 and had more than $530 million in assets at the end of March 2010, making it the second largest infrastructure fund by far.

Also, its performance–it opened for business just as the stock market was reaching a 12-year low–has far outstripped its peers, with a 99% gain for the year to March 31, 2010. Its annual expense ratio is one of the lowest of the group, though like most others it charges an upfront load and it only pays dividends annually. Its top three holdings at the end of the first quarter were Sanmina-Sci, a California contract manufacturer of electronics, Long Island-based telecom network supplier Tellabs, and engineering and construction firm Chicago Bridge & Iron.

The Morgan Stanley Global Infrastructure Fund (UTLAX) is the largest of the remaining funds, with $86 million in assets as of the end of April 2010, an important consideration if you think smaller funds could close. Like the Cohen & Steers fund, this fund began life as a utility fund, changing focus in November 2008. It charges an upfront sales load, though its annual expense ratio is the lowest of the group. Its three top holdings as of April 30, 2010 were U.K. utility National Grid, pipeline operator Transcanada Corp., and telecom equipment supplier American Tower.


S&P Senior Financial Writer Vaughan Scully can be reached at Vaughan_scully@standardandpoors.com. Send him your ideas for mutual fund story topics.