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CEFL Still Attractive With 22.4% Yield And Large Component Discounts To Book Value

My projection of a $0.2659 monthly dividend for CEFL would result in a 22.4% yield on an annualized compounded basis. The weighted average discount to book value for the closed-end funds that comprise CEFL is a substantial 13.4%. The action by UBS to not issue any new notes of its outstanding ETRACS ETNs, which included CEFL, does not impair the credit or liquidity of CEFL. Fidelity, which a prohibited its clients from buying the old ETRACS ETNs such as CEFL has reversed that policy and has resumed allowing purchases of CEFL. The enormous discount to book value for many closed-end funds increased somewhat from last month. Last month, all 30 of the index components of the UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ), and the YieldShares High Income ETF (NYSEARCA: YYY ), which is based on the same index and thus has the same components as CEFL, but without the 2X leverage, traded at discounts to book value. They are trading at even deeper discounts to book value now. From the inception of CEFL until three months ago, there were always some component closed-end funds trading at premiums to book value. Three months ago, two of the components were trading at premiums to book value. On a weighted average basis, the closed-end funds that comprise CEFL are trading at a 13.41% discount to book value as of November 20, 2015 as compared to 11.77% a month ago. The median discount for the 30 closed-end funds is 13.73% as compared to 12.41% a month ago. Thus, the case for CEFL based on the large discounts to book value is even more compelling. There has been some confusion regarding the decision by UBS AG (NYSE: UBS ) that it does not intend to issue any new notes in 38 of its outstanding ETRACS ETNs. These include CEFL. UBS stated in an October 8, 2015 press release : “…This announcement does not affect the terms of the outstanding Series A ETRACS ETNs identified below, including the right of noteholders to require UBS AG to redeem their notes on the terms, and at the redemption price……. In connection with the previously announced transfer by UBS AG to UBS Switzerland AG of specified assets, UBS Switzerland AG became a co-obligor of all outstanding debt securities designated as Series A, including the Series A ETRACS ETNs, issued by UBS AG prior to the transfer date…” This in no way impairs the rights or liquidity of CEFL and there are now two stated co-obligors for the ETNs, which if anything improves their credit. However, Fidelity for a while did not allow its customers to buy the Series A ETRACS ETNs. This caused some confusion and inconvenience for Fidelity customers and some frustration for Fidelity employees who realized this prohibition makes very little sense. However, Fidelity has changed its policy and now allows its customers to buy the Series A ETRACS ETNs. Closed-end funds typically trade at either discounts or premiums to book value. On balance, there is a slight bias towards discounts. Because of significant changes in the composition of the index, comparisons of aggregate discounts to book value from previous years are not very meaningful. That said, the 13.8% discount two months ago was the largest since the inception of CEFL. Seven months ago, CEFL had an 8.6% weighted discount to book value. Thus, in just six months, the discount had increased from 8.6% to 13.8%, and is still near the all-time record at the current 13.41% In attempting to find an explanation for the extreme discount to book values that the closed-end funds that comprise CEFL and YYY are trading at I considered two possible factors. One concern with many closed-end funds is that their dividends include a significant amount of return of capital. I ran regression analysis to determine if there was any correlation between the proportion of the dividend paid by a closed-end fund that represents a return of capital and the discount to book value that the closed-end fund is trading at. For the 30 closed-end funds that comprise the index CEFL is based on there was no statistically significant relationship. Another factor is the relatively high dividends paid by the closed-end funds. The 30 closed-end funds that comprise the index CEFL is based on have an average dividend yield based on the most recent dividend on an annualized but before compounding of 10.4%. These range from the highest GAMCO Global Gold Natural Resources & Income Trust (NYSEMKT: GGN ) with a yield of 16.67% to the lowest (still relatively high) yield of 8.33% of Invesco Dynamic Credit Opportunities Fund (NYSE: VTA ). A possible reason for the large discounts to book value might be that the relatively high dividend yields of the 30 closed-end funds cause investors to believe that these high yields are unsustainable or that high yields imply high risks. I ran regression analysis to determine if there was any correlation between the dividend yields and the discounts to book value that the closed-end fund are trading at. For the 30 closed-end funds that comprise the index CEFL is based on, there was no statistically significant relationship. Looking at the extremes in dividend yields with GGN yielding 16.67% and at a 12.35% discount to book value and VTA with an 8.33% yield and a 12.29% discount to book value also suggests no correlation between dividend yields and discounts to book value. For many securities other than closed-end funds, such as common stocks, discounts or premiums to book values are logically based on the business prospects for companies. Thus, Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) trades at significant premium to book value, while Peabody Energy (NYSE: BTU ) trades at a significant discount to book value, reflecting differing market perceptions of the future prospects for those companies. Google trades at approximately 5X book value while BTU trades at about one-fifth of book value. In my article: mREITs Impacted By Enormous Price To Book Swing – MORL Yielding 27.6%, I discussed the large discounts to book value that mREITs such as American Capital Agency Corp. (NASDAQ: AGNC ) are trading at. The logic behind mREITs such as AGNC trading at significant discounts to book value is primarily based on the possible impacts of higher future interest rates. Whether one agrees or disagrees with the magnitudes of the discounts or premiums to book for securities such as Google, Peabody and AGNC there are facts and logic related to each company’s business prospects that could possibly explain or justify changes in the premiums or discounts that have occurred in those stocks. There are no such facts or changes in market forecasts of business prospects that can possibly explain or justify changes in the premiums or discounts that have occurred in the closed-end funds that comprise CEFL. For closed-end funds, changes in the premiums or discounts to book value should be solely based on the value that investors place on the relative advantages and disadvantages of the closed-end fund structure, rather than the differing market perceptions of the future prospects for the securities in the closed-end funds’ portfolios. Investors in closed-end funds could purchase the securities held by a closed-end fund themselves. In most cases, there are also open-end funds available to investors that have risk, return and expense characteristics similar to any given closed-end fund. Changes in market perceptions of the prospects of the securities that comprise the portfolios of closed-end funds cannot logically explain or justify any change in the magnitudes of the discounts or premiums to book for the closed-end funds. Any such changes in market perceptions of the prospects of the securities in the portfolio should be reflected in the prices of the portfolio securities themselves. Thus, the ratio of the price of the closed-end fund to its book value should not be related to the expectations of the prospects for the portfolio securities held by the closed-end fund. If investors value the advantages of diversification, management and possibly lower transaction costs associated with owning a closed-end fund rather than owning the individual securities that comprise the closed-end fund’s portfolio more than the fees and expenses, which are the primary negative aspect of closed-end funds, then the closed-end fund will trade at a premium to book value. Conversely, if investors feel that the fees and expenses of the closed-end fund outweigh the advantages of diversification, management and possibly lower transaction cost associated with owning a closed-end fund, it will trade at a discount to book value. The trade-offs between the advantages and disadvantages associated with closed-end funds relative to the securities that comprise the portfolios of the closed-end funds are rational reasons for the closed-end funds to trade at discounts or premiums to book value. However, it is not rational for the discount or premium to be influenced by expectations of future returns on the securities that comprise the portfolios of the closed-end funds. If the market thinks that the securities in a closed-end fund’s portfolio will decline, and thus the net asset or book value of the closed-end fund will decline, there is no reason why the premium or discount that the closed-end fund is trading at should change. Some closed-end funds employ limited amounts of leverage. As investment companies, closed-end funds cannot have more than 33% leverage and most employ less, if any. That a closed-end fund does or does not employ a relatively small amount of leverage should not impact the premium or discount that the closed-end fund is trading at. Leverage is the easiest characteristic of a security to offset. Thus, if an investor was interested in a security but did not like the fact that the security employed 20% leverage, the investor could offset that leverage by combing that security with a risk-free asset. For example, if you had $10,000 to invest and you liked a closed-end fund but were unhappy with the 20% leverage, investing $8,000 in the closed-end fund and $2,000 in a risk-free asset will result in the same risk/return profile as investing $10,000 in the same closed-end fund, if that fund did not employ any leverage. Likewise, if you liked a closed-end fund but would rather that fund employed more leverage, you can buy that fund on margin and get in the same risk/return profile as investing in the fund if it had more leverage. Thus, leverage or lack of leverage should not influence the premium or discount that the closed-end fund is trading at since any leverage in a closed-end fund can be offset by an investor. There should be some limits as to how far away from book value a closed-end fund should trade. If a closed-end fund is trading at a sufficiently high premium to book value, an arbitrage opportunity could exist. Buying the securities in the closed-end fund’s portfolio and simultaneously selling the closed-end fund should generate a profitable arbitrage. Likewise if a closed-end fund is trading at a large enough discount, buying the closed-end fund and selling the securities that comprise the portfolio, it could generate arbitrage profits. These types of arbitrage would be risk arbitrage as opposed to riskless arbitrage. In riskless arbitrage, one buys a security or commodity and simultaneously sells something that is the equivalent of what you sold. An example of riskless arbitrage would be after a merger had been approved in which the acquirer is issuing one share of its stock for two shares of the company being acquired, you simultaneously buy two shares of the company being acquired for a total cost less than a share of the acquirer. This would essentially lock in a profit that would be realized when the merger closed and the values converged. Attempting to take advantage of the discount to book value being irrationally wide for a closed-end fund would be an example of risk arbitrage since there is no terminal event that will make the value of what you buy converge with what you sell. It may be irrational for a closed-end fund to trade at a 10% discount to book value. However, there is always the possibility that it could go to a 15% discount. As Keynes famously said, “The market can stay irrational longer than you can stay solvent.” Closed-end funds do not usually provide convenient opportunities for explicit risk arbitrage transactions where one security is bought and the other security is shorted. Retail investors usually cannot use the proceeds from selling some securities short to buy other securities. Hedge funds and institutions that may be able to use the proceeds from selling some securities short to buy others might find closed-end funds, and especially some of the securities that comprise the portfolios of the closed-end funds, not liquid enough to trade in. Even market participants who are able to use the proceeds from selling some securities short to buy others might be dissuaded from buying closed-end funds and shorting the securities in the closed-end funds’ portfolio, because of the fees and expenses charged by the closed-end funds. However, if the discount to book value is large enough, the fees and expenses charged by the closed-end funds could be offset by the discount to book value and thus generate a positive carry for a long closed-end fund — short the fund’s portfolio position. This would be especially true for closed-end funds that specialize in securities that generate higher income, such as those in the index upon which CEFL and its unleveraged counterpart YYY are based. An example of the discount to book value more than offsetting the fees and expenses would be a hypothetical closed-end fund whose portfolio securities yielded 10% before expenses. Most income-oriented closed-end funds have expense ratios lower than 1%. Shorting $100 worth of the securities that comprise the fund would require payments of $10 representing 10% annually to those who the securities were borrowed from. The $100 proceeds from the short sale could be used to acquire $100 of the closed-end fund. If the closed-end fund was trading at a 14% discount, $100 of the fund would represent 100/.86 = $116.28 worth of the securities in the fund. These securities yield 10%, so the gross income from the fund position would be $11.63. The net income, assuming a 1% expense ratio, would be $10.63. Thus, even after expenses and fees, an account long the closed-end fund would generate higher income than the portfolio securities while it waited for the discount to narrow to realize the risk arbitrage profit. While explicit risk arbitrage where the portfolio securities are shorted and the proceeds are employed to buy the closed-end fund might not occur in significant quantities to narrow the discount to book value, implicit arbitrage should eventually have an impact. Implicit risk arbitrage would occur as investors holding or wanting to hold securities with similar risk/return characteristics as a closed-end fund or the portfolios held by the closed-end fund shift from other securities to the closed-end fund. Institutional investors who had portfolios that contained securities similar to or identical to those held in a close-end fund could improve their risk/return profile by shifting out of securities in the closed-end fund to the closed-end fund, if the discount to book value for the closed-end fund was large enough. Retail investors could switch from securities held in portfolios of close-end fund to the closed-end fund and improve their risk/return profile if the discount to book value for the closed-end fund was large enough. More important, investors could shift out open-end mutual funds into closed-end mutual funds with similar objectives and portfolios. Open-end mutual funds are sold and redeemed at net asset value. Thus, there is never any discount or premium to book value for an open-end mutual fund. Advantages for investors in no-load mutual funds are that there are no transactions costs and the funds can always be redeemed at net asset or book value. Closed-end funds usually require some brokerage commission to buy and sell them, and there is risk that the closed-end fund will fluctuate due to changes in the premium or discount to net asset value in addition to fluctuation in the portfolio securities. The advantages of no-load open-end mutual funds are somewhat offset by the lower fees and expenses that closed-end funds usually have. When closed-end funds are trading at large discounts to book value, investors can significantly increase their returns by switching from open-end funds to closed-end funds that have similar assets but are selling at discounts to net asset value and typically have lower fees and expenses. When an investor redeems an open-end fund at net asset value, the open-end fund sells portfolio securities to fund the redemption. That would tend to lower the market prices of those portfolio securities. If the investor uses the proceeds from the redemption of the open-end fund to buy shares in a closed-end fund that holds similar portfolio securities, the net effect would be to put downward pressure on the market prices of the portfolio securities and upward pressure of the market prices of the closed-end funds. Thus, the discount to book value for the closed-end funds will tend to decline. This large discount to net asset value alone is still a good reason to be constructive on CEFL. It should be noted that saying CEFL components are now trading at a deeper discount to the net asset value of the closed-end funds that comprise the index does not mean that CEFL does not always trade at a level close to its own net asset value. Since CEFL is exchangeable at the holders’ option at indicative or net asset value, its market price will not deviate significantly from the net asset value. The net asset value or indicative value of CEFL is determined by the market prices of the closed-end funds that comprise the index upon which CEFL is based. My constructive view on CEFL stems not only from the wide discount to book value of the closed-end funds, but also from the very large dividends paid by CEFL. One troubling aspect of CEFL is the significant amount of the dividends paid by the closed-end funds that comprise CEFL that consists of return of capital. My calculation using available data indicates that 23.7% of the December CEFL dividend will consist of return of capital. However, there does not seem to be any statistically significant relationship between return of capital and the discounts to book value that the individual closed-end funds trade at. Of the 30 index components of CEFL, and YYY, which is based on the same index and thus has the same components as CEFL, but without the 2X leverage, 29 now pay monthly. Only the Morgan Stanley Emerging Markets Domestic Debt Fund (NYSE: EDD ) now pays quarterly dividends in January, April, October, and July. Thus, EDD will not be included in the December 2015 CEFL monthly dividend calculation. My calculation projects an December 2015 dividend of $0.2659. While the 2014 year-end rebalancing has reduced the monthly CEFL dividend, it is still very large. For the three months ending December 2015, the total projected dividends are $0.8261. The annualized dividends would be $3.3044. This is a 20.4% simple annualized yield with CEFL priced at $16.20. On a monthly compounded basis, the effective annualized yield is 22.4%. Aside from the fact that with a yield above 20%, even without reinvesting or compounding, you get back your initial investment in only five years and still have your original investment shares intact. If someone thought that over the next five years markets and interest rates would remain relatively stable, and thus CEFL would continue to yield 22.4% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $274,919 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $22,400 initial annual rate to $61,629 annually. CEFL component weights and prices as of November 20, 2015 Name Ticker Weight Price NAV price/NAV ex-div dividend frequency contribution return of capital First Trust Intermediate Duration Prf.& Income Fd FPF 4.81 21.58 23.67 0.9117 11/2/2015 0.1625 m 0.0118 MFS Charter Income Trust MCR 4.54 8.05 9.22 0.8731 11/17/2015 0.06218 m 0.0114 0.0146 Eaton Vance Tax-Managed Global Diversified Equity Income Fund EXG 4.52 9.1 9.93 0.9164 11/19/2015 0.0813 m 0.0131 0.0696 Eaton Vance Limited Duration Income Fund EVV 4.45 12.75 14.78 0.8627 11/10/2015 0.1017 m 0.0115 Eaton Vance Tax-Managed Diversified Equity Income Fund ETY 4.41 11.29 12.04 0.9377 11/19/2015 0.0843 m 0.0107 Alpine Total Dynamic Dividend AOD 4.4 7.94 9.47 0.8384 11/18/2015 0.0575 m 0.0103 Clough Global Opportunities Fund GLO 4.36 10.95 12.82 0.8541 11/17/2015 0.1 m 0.0129 Blackrock Corporate High Yield Fund HYT 4.31 9.93 11.51 0.8627 11/12/2015 0.07 m 0.0099 0.0012 Alpine Global Premier Properties Fund AWP 4.3 5.89 7.1 0.8296 11/18/2015 0.05 m 0.0118 0.0300 Doubleline Income Solutions DSL 4.27 17.02 19.61 0.8679 11/10/2015 0.15 m 0.0122 Prudential Global Short Duration High Yield Fundd GHY 4.25 13.9 16.43 0.8460 11/18/2015 0.11 m 0.0109 Western Asset Emerging Markets Debt Fund ESD 4.22 13.99 16.85 0.8303 11/18/2015 0.105 m 0.0103 0.0112 PIMCO Dynamic Credit Income Fund PCI 4.21 18.23 21.5 0.8479 11/9/2015 0.16406 m 0.0123 ING Global Equity Dividend & Premium Opportunity Fund IGD 4.17 7.36 8.41 0.8751 11/2/2015 0.076 m 0.0140 0.0084 BlackRock International Growth and Income Trust BGY 3.89 6.29 7.07 0.8897 11/12/2015 0.049 m 0.0098 0.0466 GAMCO Global Gold Natural Resources & Income Trust GGN 3.69 5.04 5.75 0.8765 11/11/2015 0.07 m 0.0166 0.0700 Morgan Stanley Emerging Markets Domestic Debt Fund EDD 3.54 7.42 8.79 0.8441 9/28/2015 0.22 q Prudential Short Duration High Yield Fd ISD 3.36 14.48 16.79 0.8624 11/18/2015 0.11 m 0.0083 Aberdeen Aisa-Pacific Income Fund FAX 3.29 4.49 5.48 0.8193 11/19/2015 0.035 m 0.0083 0.0175 Calamos Global Dynamic Income Fund CHW 3.01 7.45 8.81 0.8456 11/6/2015 0.07 m 0.0092 0.0391 MFS Multimarket Income Trust MMT 2.97 5.69 6.63 0.8582 11/17/2015 0.04482 m 0.0076 0.0142 Backstone /GSO Strategic Credit Fund BGB 2.65 13.91 16.15 0.8613 11/18/2015 0.105 m 0.0065 0.0012 Western Asset High Income Fund II HIX 2.1 6.68 7.36 0.9076 11/18/2015 0.069 m 0.0070 0.0006 Blackrock Multi-Sector Income BIT 2.09 15.69 18.68 0.8399 11/12/2015 0.1167 m 0.0050 Allianzgi Convertible & Income Fund NCV 1.8 5.79 6.59 0.8786 11/9/2015 0.065 m 0.0066 Wells Fargo Advantage Multi Sector Income Fund ERC 1.71 11.4 13.68 0.8333 11/12/2015 0.0967 m 0.0047 0.0283 Wells Fargo Advantage Income Opportunities Fund EAD 1.33 7.5 8.64 0.8681 11/12/2015 0.068 m 0.0039 Nuveen Preferred Income Opportunities Fund JPC 1.28 9.17 10.28 0.8920 11/10/2015 0.067 m 0.0030 Allianzgi Convertible & Income Fund II NCZ 1.09 5.13 5.86 0.8754 11/9/2015 0.0575 m 0.0040 Invesco Dynamic Credit Opportunities Fund VTA 0.97 10.81 12.41 0.8711 11/12/2015 0.075 m 0.0022

Is Listed Infrastructure The Most Attractive Investment Avenue Now?

Summary In the current global scenario where traditional asset classes no longer assure stable returns, listed infrastructure is attracting investors in a big way. In 2015, investors have largely been cautious about the equity markets due to expectations of stable growth in the US and the likely interest rate hike by the Fed. However, inconsistent economic indicators, the Greek crisis, and a slowdown in China impacted returns. Even amid concerns about the global economy, bond yields were at their lowest in most developed economies, making fixed income investments unattractive. Global fund managers consider real estate an alternative investment avenue for stable returns on their investments, as real estate assets are likely to witness substantial price appreciation. By Ati Ranjan and Subarna Poddar Global fund managers consider real estate an alternative investment avenue for stable returns on their investments, as real estate assets are likely to witness substantial price appreciation. Listed infrastructure, an up-and-coming segment of the real estate sector, is gradually gaining traction among fund managers due to its monopolistic nature, price inelasticity, stable predicted cash flows, and inflation hedging characteristic. Although these assets are also traded in the form of equities, the underlying asset is immune to default risks due to strong government backing. Furthermore, these equities act as defensive plays during the downturn. Listed infrastructure assets are largely government or quasi-government owned. The sovereign backing makes ongoing infrastructure projects less likely to default compared with other privately held real estate asset classes. These assets work in a cost plus model; hence, profitability is already hedged. Also, listed infrastructure assets typically enjoy monopoly due to entry barriers set by the local governments, thus maintaining stable cash flows. Demand for these assets is often inelastic to price changes, such as electricity, water, toll, as people continue using these utilities despite tariff changes. Thus, this asset class provides stable returns even during an economic downturn. Although investment in infrastructure is capital intensive, the equity route makes it cheaper, investor friendly and keeps transactions transparent. High-return, moderate-risk asset class What is listed infrastructure? Listed infrastructure is a comprehensive and diversified asset class of largely state-owned or public-private partnership (NYSE: PPP ) companies that develop, manage, and own assets related to energy, communications, water, transportation, and other systems essential for an economy. This asset class is segmented into small units and listed as equities on stock exchanges. Hence, the quantum of investment is lower than that of a direct investment in real estate. Furthermore, these equities act as defensive plays and protect investors during market corrections as they carry low default risk and are backed by sovereigns. The asset class outperformed during pre and post crisis period If we compare the performance of the S&P Global Infrastructure Index with its peers over the pre and post economic crisis period, we can see that infrastructure clearly outperformed during the pre-crisis (2006-07) and post recovery period, i.e., 2012 onward. During the recovery period (2010-2011), the asset class clearly outperformed equities (S&P 500 Index). The chart below shows that the asset class has remained superior to equity investments over 12 years and, hence, we can conclude that it offers better returns irrespective of the economic conditions. Performances of various asset classes over last 12 years: Source: Bloomberg Most attractive features of listed infrastructure Financial and operational performance · Access: Direct exposure to global basic infrastructure facilities that are monopolistic · Liquidity: Liquid exposure to infrastructure investments, and no issue with deal flows and fixed investment horizon · Transparency: Access to existing and established infrastructure facilities, and no issue with blind pool investing · Low impact of regulatory changes: Regulatory changes are managed by governments; as these assets are primarily government or PPP projects, the regulatory changes are likely to have low impact on them · Diversification: Allows global investors to easily diversify their portfolio holdings as per the specific risk profile (e.g., geographic allocation, currency, level of gearing, and regulatory and political risks) · Cost: Cost is lower than unlisted infrastructure investments or direct buying/selling of properties · Level of gearing: Lower level of gearing than unlisted infrastructure and real estate firms, and primarily backed by government funding Classification of listed infrastructure Source: Aranca Research Cash generation and return · Higher dividend: Dividend accounted for over 33% of the overall returns of the S&P Global Infrastructure Index in the last 10 years; average dividend growth outpaced average inflation. · Predictable cash flow: The assets work in a cost plus model; therefore, future profitability is secured. · Inflation protection: Revenues of listed infrastructure companies are linked to inflation, thereby providing protection against it. (i.e. concessions permitting rent escalations linked to inflation, regulated price mechanisms that consider rate of inflation) Growth in dividend per share of listed infrastructure companies vs. CPI (click to enlarge) Source: Bureau of Labor Statistics, IMF, Bloomberg, Aranca Research Operational risks Delays: Since these kinds of projects are majorly government owned, there are possibilities of delays in project execution; this could interrupt income generation from the project. Financing: As many emerging market economies are facing funding shortage, there is possibility of slower disbursement of resources as well, as big funding organizations may not sanction adequate grants. Recovery of other alternative asset classes: Other asset classes could recover at a faster pace and make investment in listed infrastructure assets less attractive. Why listed infrastructure? Since the beginning of 2015, global equity markets have witnessed significant volatility due to a series of global events. Slowdown in China’s economy, declining GDP of Japan and the Greek debt crisis dampened investor sentiment. The Eurozone still has a long road ahead in terms of complete recovery. Amid a strengthening dollar, emerging economies such as China and India are not offering encouraging signs to equity investors. The US is the only market that has performed fairly well in 2015 compared with other geographies, supported by a bullish dollar and an expected rate hike by the US Federal Reserve later this year. The ongoing volatility in oil prices have kept investors directionless. Oil prices witnessed a steep fall until mid-2015, primarily due to strong non-OPEC oil production forecast. The OPEC’s refusal to reduce oil output worsened the situation. Furthermore, the withdrawal of sanctions on Iran after the nuclear deal exerted pressure on oil prices. The weak outlook for oil prices impacted the earnings of companies in the energy sector across the world, which consequently reflected in their stock prices. In addition, the ongoing drop in commodity prices affected investor sentiment across global markets. Separately, possibility of new drug pricing rules triggered negativity about biotech stocks, which was once considered the most defensive sector. Performance of major global equity indices (2015 YTD) Source: Bloomberg Among the investment options available, portfolio managers prefer fixed income or bonds, real estate investment trusts (REITs), bullion, and listed infrastructure to create a balanced portfolio. Bond yields globally are already under pressure and reached their all-time lows in January 2015 (US 30-year Treasury yield at +1.7%, UK 10-year gilt yield +1.4%). Moreover, any increase in the rates, especially a rate hike by the US Fed, would make them an unattractive investment option. With regards to gold, a sharp drop in its prices has severely impacted its safe-haven status. With continued decline in commodity and gold prices, the bullion price is expected to remain under pressure in the near term. Real estate is another alternative that provides higher capital gains; however, it is capital intensive and, hence, represents higher risk. In such a scenario, where most of the sectors are underperforming, a defensive play with stable returns and moderate risks is likely to gain attention of the global fund managers. Listed infrastructure is an asset class with all the above mentioned qualities. It offers high returns as well as steady income and assured capital benefits. The equity route makes it less capital intensive and provides benefits of the bull-run during positive economic scenario. Furthermore, this asset class is inflation protected. The inflation-linked nature of revenue from infrastructure businesses enables an automatic hedging against any rise in interest rates, thereby providing listed infrastructure an edge over other investment options. Market size of listed infrastructure assets to rapidly increase According to McKinsey Global Institute, infrastructure investment of around USD57 trillion would be required to achieve the projected global GDP by 2030, accounting for 3.5% of the expected global GDP in 2030. Furthermore, the Organization for Economic Co-operation and Development estimates a required global investment of USD40 trillion in new and existing infrastructure projects by 2030. With such large infrastructure spending, opportunities in listed infrastructure are expected to substantially increase. Market capitalization of listed infrastructure assets has increased to USD3.3 trillion in 2015 YTD as compared to USD861 billion in 15 years ago. Market capitalization of global listed infrastructure Source: Aranca Research The advancements in the global listed infrastructure market have enabled easier access to an asset class that has been traditionally illiquid. Historically, the global listed infrastructure market has performed robustly irrespective of the market scenario. This asset class offers higher returns at moderate risk. Currently, in addition to several smaller-sized funds, six major global funds are operating in this segment, with a combined asset size of USD4 billion. Some major players in the listed infrastructure segment that hold investments from top global fund managers are: Source: Fund fact sheets, Aranca Research Larger players attract major portion of investments in listed infrastructure The S&P Global Infrastructure Index comprises 76 companies, with a combined market capitalization of nearly USD1.2 trillion. The top 10 companies account for a large portion of the market capitalization. In terms of sector classification, Industrials accounts for 40.7% of the total index weight, followed by Utilities (39.3%) and Energy (20.0%). The key index players attract higher investments from global fund managers. S&P Global Infrastructure Index Country Number of constituents Index weight (%) US 22 35.1% Canada 7 7.9% Australia 4 7.8% Italy 4 7.1% UK 4 6.9% France 3 6.9% China 8 5.9% Spain 2 5.2% Japan 4 4.1% Germany 2 2.7% Singapore 3 2.6% Mexico 2 2.3% New Zealand 1 1.3% Switzerland 1 1.3% Brazil 3 1.1% Chile 2 0.7% Austria 1 0.4% Hong Kong 2 0.4% Netherlands 1 0.3% Source: Index fact sheet Listed infrastructure – an attractive alternative investment in current scenario Listed infrastructure assets have high potential for steady returns, low volatility, diversification, higher income, longer duration, and abundant capacity. Such investment options were traditionally considered off-market activities; however, listed infrastructure is an upcoming and promising real estate investment alternative, and is likely to be widely accepted globally. We believe the asset class is not overvalued and is trading at a fair projected 12-month P/E of 8.05x (P/E of S&P Global Infrastructure Index) compared with 15.2x P/E of S&P 500, offering significant opportunities for investors. Emerging investment opportunities in the water, communications and transmission, transportation, and distribution sectors are expected to substantially influence the listed infrastructure segment, driving growth in this segment and attracting long-term investors. Upgrading infrastructure is expected to become one of the key focus areas for governments of emerging economies. Demand for electricity, water, and sanitation would significantly increase due to higher population growth and urbanization. Hence, despite the recent drop in commodity prices, resource-rich governments would continue investing significant capital into infrastructure investments. Key drivers of listed infrastructure assets across the world are: Global population growth: According to the IMF projections, the global population is expected to grow over 8 billion by 2020. Increasing population requires additional housing and power supply, public transport, clean water, healthcare, and education facilities, which would further increase demand for public spending in the infrastructure sector. Increasing wealth: With per capital income growing in developing countries, the population would start expecting world-class infrastructure facilities. Economic expansion: Economic expansion in Brazil, Russia, India, and China (BRIC nations) and Southeast Asia would boost government spending on social infrastructure. Urbanization: With growing urbanization in the developed as well as developing countries, demand for road transportation, telecom, and energy utilities is expected to significantly rise. Climate change: Improved long-distance infrastructure is essential not only for more efficient provision of energy but also for potentially remote and renewable energy resources such as solar and wind. Climate change represents both a challenge and an opportunity for development in emerging markets. Limited supply: Roads, airports, and pipelines can only operate up to a fixed maximum capacity, beyond which additional assets are required. As emerging markets develop, governments typically focus on ensuring the transport infrastructure is sufficiently robust to support growth. Shift in financing: As governments worldwide increasingly face fiscal constraints, particularly in the developed world, the private sector is expected to be involved greatly in construction responsibilities through the PPP route. The private sector is actively involved through PPP into listed infrastructure projects in Australia, Europe, Canada, and the US, and this trend is expected to continue. Performance of two of the largest listed infrastructure funds Source: Fund fact sheets Major listed infrastructure funds and their asset size (click to enlarge) Source: Fund fact sheets, Aranca Research Breakdown of the listed infrastructure investment universe Source: Aranca Research.

Altria’s Perverse Regulation

Altria and investing in regulated industries. How tobacco regulation protects big tobacco. CrossFit vs. Washington DC. Rangeley Capital’s portfolio managers host a fifteen-minute podcast. If you missed the previous episode, then please check out A 105% Dividend? . We discussed Winthrop Realty (NYSE: FUR ). The end of Winthrop is near, but not before you could get a safe, quick return of your capital with a healthy return. We also talk about the article Sen. Bob Corker Profits on Quick Stock Trades . In this episode we talk about the challenges of investing in companies such as Altria (NYSE: MO ) that compete in highly regulated industries. We also discuss Anti-Licensing Movement Scores a Victory . Crossfit is joining Uber, Airbnb, and the other disruptive entrants that are fighting back against entrenched incumbents and their regulatory henchmen. The podcast is hosted by Andrew Walker and Chris DeMuth Jr, two Rangeley Capital portfolio managers. You can follow us on Twitter (NYSE: TWTR ) ( Andrew and Chris ). You can subscribe to the podcast on iTunes here or on Soundcloud here .