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Another Market Crisis? My Survival Manual/Journal

I would be lying if I said that I like down markets more than up markets, but I have learned to accept the fact that markets that go up will come down, and that when they do so quickly, you have the makings of a crisis. I find myself getting more popular during these periods as acquaintances, friends and relatives that I have not heard from in years seem to find me. They are invariably disappointed by my inability to forecast the future and my unwillingness to tell them what to do next, and I am sure that I move several notches down the Guru scale as a consequence – a development that I welcome. To save myself some repetitions of this already tedious sequence, I think it is best that I pull out my crisis survival journal/manual, a work in progress that I started in the 1980s and that I revisit and rewrite each time the markets go into a tailspin. It is more journal than manual, more personal than general, and more about me than it is about markets. So, read on at your own risk! The Price of Risk For me, the first casualty in a crisis is perspective, as I find myself getting whipsawed with news stories about financial markets, each more urgent and demanding of attention than the previous one. The second casualty is common sense, as my brain shuts down and my primitive impulses take over. Consequently, I find it useful to step back and look at the big picture, hoping to see patterns that help me make sense of the drivers of market chaos. It is my view that the key number in understanding any market crisis is the price of risk. In a market crisis, the price of risk increases abruptly, causing the value of all risky assets to drop, with that drop being greater for riskier assets. While the conventional wisdom, prior to 2008, was that the price of risk in mature markets is stable and does not change much over short periods, the last quarter of 2008 changed (or should have changed) that view. I started tracking the price of risk in different markets (equity, bond, real estate) on a monthly basis in September 2008 – a practice that I have continued through the present. Getting a forward-looking, dynamic price of risk in the bond market is simple, since it takes the form of default spreads on bonds, and FRED (the immensely useful Federal Reserve Database ) has the market interest rates on Baa rated (Moody’s) bonds going back to 1919, with data available in annual, monthly or daily increments. That default spread is computed by taking the difference between this market interest rate and the US Treasury bond rate on the same date. Getting a forward-looking, dynamic price of risk in the equity markets is more complicated, since the expected cash flows are uncertain (unlike coupons on bonds), and equities don’t have a specific maturity date, but I have argued that it can be done, though some may take issue with my approach. Starting with the cumulative cash flow that would have been generated by investing in stocks in the most recent twelve months, I estimate expected cash flows (using analysts’ top-down estimates of earnings growth) and compute the rate of return that is embedded in the current level of the index. That internal rate of return is the expected return on stocks, and when the US Treasury bond rate is netted out, it yields an implied equity risk premium. The January 2015 equity risk premium is summarized below: That premium had not moved much for most of this year, with a low of 5.67% on March 1 and a high of 6.01% in early February, and the ERP at the start of August was 5.90%, close to the start-of-the-year number. Given the market turmoil in the last weeks, I decided to go back and compute the implied equity risk premium each day, starting on August 1. Note that not much changes until August 17, and that almost all of the movement have been in the days between August 17 and August 24. During those seven trading days, the S&P 500 dropped by more than 11%, and if you keep cash flows fixed, the expected return (IRR) for stocks increased by 0.68%. During the same period, the US Treasury bond rate dropped by 0.06%, playing its usual “flight to safety” role, and the implied equity risk premium (ERP) jumped by 0.74% to 6.56%. I did use the trailing 12-month cash flows (from buybacks and dividends) as my base-year number in computing these equity risk premiums, and there is a reasonable argument to be made that these cash flows are too high to sustain, partly because earnings are at historical highs, and partly because companies are returning more of that cash than ever before. To counter this problem, I assumed that earnings would drop back to a level that reflects the average earnings over the last 10 years, adjusted for inflation (i.e., the denominator in the Shiller CAPE model), and that the payout would revert back to the average payout over the last decade. That results in lower equity risk premiums, but the last few days have pushed that premium up by 0.53% as well. My computed increases in ERP, using both trailing and normalized earnings, overstate the true change, because the cash flows and growth were left at what they were at the start of August, a patently unrealistic assumption, since this is also an economic crisis, and any slowing of growth in China will make itself felt on the earnings, cash flows and growth at US companies. That effect will take a while to show up, as corporate earnings, buyback plans and analyst growth estimates are adjusted in the months to come, and I am sure that some of the market drop was caused by changes in fundamentals. The argument that a large portion of the drop comes from the repricing of risk is borne out by the rise in the default spread for bonds, with the Baa default spread widening by 0.17%, and the increase in the perceived riskiness (volatility) of stocks, with the VIX posting its largest weekly jump ever, in percentage terms. The Repricing of Risky Assets When the price of risk changes, all risky assets will be repriced, but not by the same magnitude. Within mature markets, you should expect to see a bigger drop in stock prices at more risky companies than at safer ones, though how you define risk can affect your conclusions. If you define risk as exposure to the precipitating factor in the crisis, I would expect the stock prices of companies that are more dependent on China for their revenues to drop by more than the rest of the market. Since I don’t have data on how much revenue individual companies get from China, I will use commodity companies – which have been aided the most by the Chinese growth machine over the last decade, and therefore, have the most to lose from it slowing down – as my proxy for China exposure. The table below highlights the 20 industry groups (out of 95) that have performed the worst between August 14 and August 24: (click to enlarge) Notice that commodity companies comprise one quarter of the group, with a few cyclical and technology sectors thrown into the mix. Looking across markets geographically, changes in the equity risk premium in mature markets will be magnified as you move into riskier countries, and thus, it is not surprising to see that the carnage in emerging markets over the last week has exceeded that in developed markets, with currency declines adding to local stock market drops. In the picture below, I capture the percentage change in market capitalization between August 14, 2015, and August 24, 2015 in US dollar terms, with the P/E ratios as of August 14 and August 24 highlighted for each country: (via chartsbin.com ) Note that this phenomenon of emerging markets behaving badly cannot be blamed on China, since it happened in 2008 as well, when it was the banking system in developed markets that triggered the market rout. A Premium for Liquidity? There is another dimension, where crises come into play, and that is in the demand for liquidity. While investors always prefer more liquid assets to less liquid ones, that preference for liquidity and the price that they are willing to pay for it varies across time and tends to surge during market crisis. To see if this crisis has had the same effect, I looked at the drop in market capitalization, in US dollar terms, between August 14 and 24 for companies classified by trading turnover ratios (computed by dividing the annual dollar trading value by the market capitalization of the company): Surprisingly, it is the most liquid firms that have seen the biggest drop in stock prices, though the numbers may be contaminated by the fact that trading halts are often the reactions to market crises in many countries that are home to the least liquid stocks. If this is the reason for the return divergence, there is more pain waiting for investors in these stocks as the market drop shows up in lagged returns. To the extent that market crises crimp access to capital markets, the desire for liquidity can also reach deeper into corporate balance sheets, creating premiums for companies that have substantial cash on their balance sheets and fewer debt obligations. To test this proposition, I classified firms globally, based upon the net debt as a percent of enterprise value, and looked at the price drop between August 14 and August 24: The crisis seems to have spared no group of stocks, with the pain divided almost evenly across the net debt classes, and the largest price decline being in the stocks that have cash balances that exceed their debt. Note, however, that the multiples at which these companies trade at both prior and after the drop reflect the penalty that the market is attaching to extreme leverage, with the most levered companies trading at a P/E ratio of 3.11 (at least across the 15.76% of firms in this group that have positive earnings to report). If your contrarian strategy for this market is to screen for and buy low-P/E stocks, this table suggests caution, since a large portion of the lowest-P/E stocks will come with high debt ratios. As the public markets drop, the question of how this crisis will affect private company valuations has risen to the surface , especially given the large valuations commanded by some private companies. Since many of these private businesses are young, risky startups and that investments in them are illiquid, I would guess they will be exposed to a correction larger than what we observe in the public marketplace. However, given that venture capitalists and public investors in these companies will be self-appraising the value of their holdings, the effect of any markdown in value will take the form of fewer high-profile deals (IPO and VC financing). What now? A market crisis bring out my worst instincts as an investor. First out of the pack is fear pushing me to panic, with the voice yelling “Sell everything, sell it now”, getting louder with each bad market day. That is followed quickly by denial, where another voice tells me that if I don’t check the damage to my portfolio, perhaps it has been magically unaffected. Then, a combination of greed and hubris kicks in, arguing that the market is filled with naive, uninformed investors, and that this is my time to trade my way to quick profits. I cannot make these instincts go away, but I have my own set of rules for managing them. (I am not suggesting that these are rules that you should adopt, just that they work for me.) Break the feedback loop: Being able to check your portfolio as often as you want and in real time with our phones, tablets and computers is a mixed blessing. I did check my portfolio this morning for the damage that the last week has done, but I don’t plan to check again until the end of the week. If I find myself breaking this rule, I will consider sabotaging my wifi connection at home, going back to a flip phone or leaving for the Galapagos on vacation. Turn off the noise: I read The Wall Street Journal and Financial Times each morning, but I generally don’t watch financial news channels or visit financial websites. I become religious about this avoidance during market chaos, since much of the advice that I will get is bad, most of the analysis is after-the-fact navel gazing and all of the predictions share only one quality, which is that they will be wrong. Rediscover your faith: In my book (and class ) on investment philosophies, I argue that there is no “best” investment philosophy that works for all investors, but that there is one for you that best fits what you believe about markets and your personality. My investment philosophy is built on faith in two premises: that every business has a value that I can estimate, and that the market price will move towards that value over time. During a crisis, I find myself returning to the core of that philosophy to make sense of what is going on. Act proactively and consistently: It is natural to want to act in response to a crisis. I am no exception, and I did act on Monday, but I tried to do so consistently with my philosophy. I revisited the valuations that I have done over the past year (and you can find most of them on my website, under my valuation class) and put in limit buy orders on a half a dozen stocks (including Apple (NASDAQ: AAPL ), Tesla (NASDAQ: TSLA ) and Facebook (NASDAQ: FB )), with the limit prices based on my valuations of the companies. If the crisis eases, none of the limit orders may go through, but I would have protected myself from impulsive actions that will cost me more in the long term. If it worsens, all or most of the of the limit buys will be executed, but at prices that I think are reasonable, given the cash flow potential of these companies. Will any of these protect me from losing money? Perhaps not, but I did sleep well last night, and am more worried about whether the New York Yankees will score some runs tonight than I am about what the Asian markets will do overnight. That, to me, is a sign of health! The Silver Linings Just as recessions are a market economy’s way of cleansing itself of excesses that build up during boom periods, a market crisis is a financial market’s mechanism for getting back into balance. I know that is small consolation for you today if you have lost 10% or more of your portfolio, but there are seedlings of good news even in the dreary financial news: Live by momentum, die by it: In trading, momentum is king, and investors who play the momentum game make money with ease, but with one caveat. When momentum shifts, the easy profits accumulated over months and years can be wiped out quickly, as commodity and currency traders are discovering. Deal or no deal? If you share my view that slowing down in M&A deals is bad news for deal makers but good news for stockholders in the deal-making companies, the fact that this crisis may be imperiling deals is positive news. Rediscover fundamentals: My belief that first principles and fundamentals ultimately win out and that there are no easy ways to make money is strengthened when I read that carry traders are losing money , that currency pegs do not work when inflation rates deviate, and mismatching the currencies in which you borrow and generate cash flows is a bad idea. The Market Guru Handoff: As with prior crises, this one will unmask a lot of economic forecasters and market gurus as fakes, but it will anoint a new group of prognosticators who got the China call right as the new stars of the investment universe. If a market crisis is a crucible that tests both the limits of my investment philosophy and my faith in it, I am being tested, and as with any other test, if I pass it, I will come out stronger for the experience. At least, that is what I tell myself as I look at the withered remains of my investments in Vale (NYSE: VALE ) and Lukoil ( OTCPK:LUKOY )! Spreadsheets: Implied Equity Risk Premium Spreadsheet (August 2015) Returns (8/14-8/24) and PE ratios (before & after), by Industry Group Returns (8/14-8/24) and PE ratios (before & after), by Country

401(k) Fund Spotlight: Templeton Global Bond

Summary Lead manager Michael Hasenstab is a contrarian who is not afraid to take concentrated positions in securities where he has a high degree of conviction. Templeton Global Bond has outperformed 99% of its global bond peers over the last 10 years. The fund is wisely avoiding the most dangerous areas out there for global bond investors – sharply higher yields and sovereign debt of Japan, Western Europe, and Southern Europe. Background I select funds on behalf of my investment advisory clients in many different defined contribution plans , namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most of this article is important to understand my approach to investing in 401(k)s. Here are my key principles: 1. I do not buy ‘index hugging’ active funds if a similar index is available. Index hugging funds are those that are overly diversified and their performance never strays far from the index. Index funds almost always have a lower fee so I prefer to just own the index and let the fee savings provide a performance tailwind over time. Lastly, index hugging active funds are generally managed by people who don’t really know how to invest. This may sound harsh, but it is true. They are institutional herd products. 2. When buying actively managed funds, I look for those who are willing to go against the institutional herd and follow their own independent investment approach. I do not mind the higher fee if they have an established track record and it is not necessary that they always beat the index. Sometimes investment positions take a bit longer to pan out than investors would like to see on their quarterly statements. I take comfort in putting money with a manager(s) who is not afraid to stray from the herd. 3. I do not care what Morningstar says. Templeton Global Bond Fund Templeton Global Bond has five different share classes: A (MUTF: TPINX ), Advisor (MUTF: TGBAX ), C (MUTF: TEGBX ), R (MUTF: FGBRX ), and R6 (MUTF: FBNRX ). The class A shares are often found in 401(k)s with the load waived (i.e., no up front sales charge) and a net expense ratio of .90%. This is a reasonable fee given all that this fund offers. With $65 billion of assets it is one of the largest global bond funds out there (in fact, it was the largest in a screen I ran on Fidelity’s website). Templeton Global Bond is relatively free to roam in the bond world wherever it wants. The fund typically invests the majority of its assets in investment grade government bonds from anywhere in the world. It also regularly invests in various currency instruments and derivatives. The fund tends to focus on sovereign debt and not corporate debt. It may invest up to 25% of its assets in below investment grade debt and all of its assets in developing (or emerging) market debt. The fund’s lead manager, Michael Hasenstab, is well known within the investment industry, appearing regularly in publications such as Barrons . He has gained a reputation as a contrarian with a willingness to take concentrated positions on specific bonds that he has a high degree of conviction in. This has generally worked out well, except for a large position in Ukraine government debt that has cost the fund several billion dollars. (About 2% of the fund is currently invested in Ukraine.) In a January 2013 interview with the Financial Times , he warned that it was time to get out of “safe” government debt. His call was right on. The 10-Year Treasury Yield subsequently soared a few months later during the so-called “taper tantrum,” as shown on the following chart (note: bond prices fall when interest rates rise): ^TNX data by YCharts Excellent Performance Track Record Over the last 3-Year, 5-Year, and 10-Year periods (as of December 31, 2014), Templeton Global Bond has crushed both the benchmark and its peer group. The following table shows this: 3-Year Return 5-Year Return 10-Year Return Templeton Global Bond – Class A (without sales charge) 6.3% 5.8% 7.4% Citigroup World Government Bond Index -1.0% 1.7% 3.1% Lipper International Income Funds Average 2.1% 2.9% 4.0% As far as performance goes, there is little to complain about. The fund has consistently shown is value relative to its peers. Portfolio Positioning The makeup of the current portfolio is always the most important thing I look at when evaluating a fund. Currently, given the dynamics of my forecast , my general view on the global bond market is as follows: Completely avoid the sovereign bonds of Japan and Western Europe denominated in Yen and Euro. Completely avoid local currency emerging market bonds (non-U.S. dollar denominated) except for Russia (I expect oil prices to spike soon). U.S. and Pound Sterling government debt with very short maturities is okay. Selective U.S. dollar denominated emerging market bonds are okay, especially debt of corporations with U.S. dollar revenues and local currency expenses. Duration should be short though. Cash positions should be sizeable to take advantage of potential price dislocations created by a lack of market liquidity. (Fund cash positions should also be high to meet shareholder redemptions without having to sell quality bonds at low prices.) How does Templeton Global Bond stack up in light of my outlook? Notably, as of July 31, 2015, the fund has an average duration of only .07 years and an average weighted maturity of only 2.49 years. With a duration of .07, rates could theoretically rise 300% and the fund would only fall by .21%. (Duration measures the exposure of a fund to interest rate fluctuations.) Hasenstab clearly has the fund positioned exceptionally well for a rising rate environment. However, the trade-off here is a low yield. The fund’s 30-day standardized yield is only 2.18%. The distribution yield is higher at 3.04% (calculated by taking the standard monthly distribution of .03 x 12 divided by the current NAV price). Given the near-term danger of a sharp rate rise, I think the low yield is worth accepting. I like the fact that 79% of the fund’s currency exposure is in the U.S. dollar (as of June 30, 2015), which is more than twice that of the comparable index. I especially like the fact that, through derivative exposure, the fund has a 24% net short position in the Japanese Yen and a 36% net short position in the Euro. I am expecting the Yen to outright crash and this fund is well positioned for it. As of June 30, 2015, the fund’s largest sovereign debt holdings are as follows: South Korea – 14% Mexico – 9% Malaysia – 7% Poland – 7% Hungary – 7% Brazil – 5% Singapore – 4% Indonesia – 4% Currently, the fund also holds some smaller positions in the debt of the Philippines, India, Sri Lanka, Serbia, and Slovenia. These 13 countries are pretty much it. Sovereign wise, there is nothing here that is overly concerning to me given that the duration of the fund is so low. I like the fact that the managers have taken highly concentrated positions in the countries they feel have the strongest economic fundamentals. Hasenstab is clearly an investor and not an index hugger. This fund is by-and-large safe from the disaster awaiting holders of Japanese, Western European, and Southern European government debt. In fact, countries with strong fundamentals could see an influx of capital seeking safety as it flees these developed markets. Lastly, the fund is 28% in cash. This gives it ample room to meet client redemptions during a crisis and the flexibility to pounce on higher yielding debt when rates rise. Conclusion I think now is a good time to hold this fund if it is available in an employer-provided 401(k) plan. The hits to the fund from holding Ukraine government debt are behind it. Most notably, the fund is clearing avoiding the most dangerous risks to global bond investors. When it comes to the potential for a fixed income fund to deliver decent returns in the current market environment, Templeton Global Bond is an oasis in the midst of a desert. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to American’s within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recent Buy – Brookfield Infrastructure Partners L.P.

Summary I initiated a position in Brookfield Infrastructure Partners LP, a utilities and infrastructure company. The diverse sectors of operations and geography, coupled with regulated and contractual cash flow, makes it a very stable and attractive investment. A starting yield of 5.2% and a 5-year dividend growth rate of 12.6% make it very attractive for income-focused investors. The market jitters continue as the world turns its eyes to the US Fed – will they or wont they raise the interest rates? There are a plethora of dangerous financial situations facing the world which could possibly send the stock and bond markets into a turmoil. I continue to purchase looking for good opportunities trying to tune out the noise as a majority of these occurrences are out of control. Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. In staying true to tradition, here’s another purchase in my portfolio, this time adding a new company to my portfolio. I initiated a position in Brookfield Infrastructure Partners LP (NYSE: BIP ) (note: it also trades as BIP.UN.TO on TSX, and since I am a Canadian resident, I bought the TSX-listed shares) with 35 shares @ C$53.20. The stock yields 5.18%, adding US$74.20 (~C$96.50) to my forward annual passive income. Brookfield Infrastructure Partners, even though headquartered and based in Canada & trades on the TSX exchange, maintains its financials (and declares dividends) in USD. Company Overview Brookfield Infrastructure Partners L.P. owns and operates utility, transport, and energy businesses. The companys Utilities segment operates a port facility that exports metallurgical and thermal coal mined in the central Bowen Basin region of Queensland, Australia; approximately 10,800 kilometers of transmission lines in North and South America; and approximately 2.4 million electricity and natural gas connections in the United Kingdom and Colombia. Its Transport segment provides transportation, storage, and handling services for freight, bulk commodities, and passengers through a network of 5,100 kilometers of track in Southwestern Western Australia; approximately 4,800 kilometers of rail in South America; approximately 3,200 kilometers of motorways in Brazil and Chile; and 30 port terminals in North America, the United Kingdom, and Europe. The companys Energy segment offers energy transportation, distribution, and storage services through 14,800 kilometers of transmission pipelines; and 370 billion cubic feet of natural gas storage in the United States and Canada, as well as serves approximately 40,000 gas distribution customers in the United Kingdom. Brookfield Infrastructure Partners Limited serves as a general partner of Brookfield Infrastructure Partners L.P. The company was founded in 2007 and is based in Toronto, Canada. Corporate Structure The Brookfield companies have a complicated corporate structure, with each entity intricately weaved with other entities to form a set of public and private companies. The companies include Brookfield Asset Management, Brookfield Property Partners, Brookfield Renewable Energy Partners, and Brookfield Infrastructure Partners. The simple view of where Brookfield Infrastructure Partners fits in under the Brookfield Asset Management umbrella is summarized below. (click to enlarge) Recent Buy Decision I sold my Utilities ETF in June 2015 and have been looking into buying individual companies that can give me dividend growth and better equity ownership. In July 2015, I initiated a small position in Algonquin Power & Utilities Corp (AQN.TO) , and earlier this month I initiated a position in Canadian Utilities (CU.TO) . This adds a third company in the utilities sector. While the classification is under the Utilities sector, Brookfield Infrastructure is, as the name suggests, truly a complete infrastructure company. BIP holds interests in Utilities (39% of revenue), Transport (43% of revenue), Energy (10% of revenue) and Communication Infrastructure (8% of revenue). BIP has a great geographical diversification with operations in North America (8% of revenue), South America (27% of revenue), Europe (34% of revenue), and Australia (31% of revenue). The utilities segment operates: Coal terminals (handles 20% of global seaborne metallurgical coal exports from Australia) 10,800 Kms of electricity transmission lines in North & South America; Regulated distribution of electricity & natural gas connections. The transport segment operates: Railroads: ~5,100 km of track, sole freight rail network in Southwestern Western Australia ~4,800 km rail network in South America Toll Roads ~3,300 km of motorways in Brazil and Chile Combination of urban and interurban roads that benefit from traffic growth and inflation Ports 30 terminals in North America, UK and across Europe One of the UK’s largest port services providers The energy segment operates: Energy Transmission, Distribution and Storage 14,800 km of natural gas transmission pipelines, located primarily in the U.S. Over 40,000 gas distribution customers in the UK 370 billion cubic feet of natural gas storage in the U.S. and Canada District Energy Delivers heating and cooling to customers from centralized systems including heating plants capable of delivering ~2.8 million pounds per hour of steam heating capacity and 251,000 tons of cooling capacity and distributed water and sewage services The communication infrastructure operates: Telecommunications Infrastructure ~7,000 multi-purpose towers and active rooftop sites 5,000 km of fibre backbone located in France Generate stable, inflation-linked cash flows underpinned by long-term contracts with large, prominent customers The diverse sectors of operations and geography, coupled with regulated and contractual cash flow makes it a very stable and attractive investment. A wide economic moat Funds from operations (FFO) have risen at 23% CAGR and distribution has risen 12% CAGR since 2009. BIP is a Dividend Challenger having raised dividends for 7 consecutive years. The current yield is 5.18% and has 1-, 3-, and 5-year dividend growth rates of 11.6%, 13.3%, and 12.6%. BIP has a BBB+ (stable) S&P credit rating and the debt/equity 1.86, and the company holds enough cash to service the debt. Debt repayment schedule has a well laddered maturity profile. BIP just announced earlier this week that it will acquire Australian port operator Asciano for US$6.6B – which will expand the company’s footprint in Australia and help better compete in the space giving BIP better recognition and visibility. The management has made it clear that this is only the beginning this transaction is a ‘stepping stone’ for more expansions in the future. While some share dilution is occurring as part of the deal, AFFO from the deal is expected to increase 7% immediately. Brookfield Infrastructure Partners LP Diversification (click to enlarge) (click to enlarge) Risks As with any investment, there are risks involved. Being in the utilities sector, the risks in the regulated industry is slightly lower. But the non-regulated industry, where most of the growth comes from – can see possible new regulations that could put future growth prospects in doubt. Rise in interest rates can cause the stock prices to tumble in the utilities sector. With international operations, currency fluctuations can cause an unknown movement in revenue, especially since the financials are reported in US$, the international earnings can seem depressed. Further Reading Disclosure: I am long AQN.TO, BIP.UN.TO, and CU.TO. My full list of holdings is available here . Disclosure: I am/we are long BIP, AQUNF, CDUAF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.