The Bottom Line: Sustainable investors considering infrastructure funds on the back of the $1.2 trillion Infrastructure Investments and Jobs Act (BIF) should proceed with caution.
Summary
Sustainable investors considering investing in infrastructure funds on the back of the $1.2 trillion Infrastructure Investments and Jobs Act (BIF)signed into law by President Biden on November 15th, now have for consideration a short list of four infrastructure funds. That said, the four funds are relatively new, having been launched in the last two years. Considering their limited operating history, short performance track records and higher than average expense ratios, investors may wish to limit their initial exposures to these funds. On the other hand, they may wish to consider exercising patience and instead of making an investment decision at this time, resolve to monitor these funds over a period of six-to-twelve months.
The $1.2 trillion Infrastructure Investments and Jobs Act (BIF) signed into law on November 15th includes $550 billion in new spending for a broad range of physical infrastructure
On November 15th, President Biden signed into law the $1.2 trillion Infrastructure Investments and Jobs Act (BIF) infrastructure plan. The law includes $550 billion in new spending for a broad range of physical infrastructure on top of a five-year reauthorization of expiring traditional surface-transportation infrastructure programs for highways, rail and transit.
The BIF covers fiscal years 2022-2026. Much of the funding will flow to or through state governments. The goal is to harness existing state government programs and offices to help properly and expeditiously allocate the designated funds to address infrastructure needs. The Department of Transportation (DOT) will be the primary federal department responsible for the infrastructure effort and the DOT secretary will retain wide discretion to allocate a significant portion of the funds — approximately $120 billion. In addition to DOT, other federal agencies will also deliver programs and funds within their jurisdiction. For example, the Department of Energy will manage modernizing and strengthening of the electric grid. The Department of Commerce will supervise the expenditure of tens of billions of dollars to deploy rural broadband. The Environmental Protection Agency is tasked with a major investment in clean drinking water programs to be implemented by the states, tribes and territories. In addition to $284 billion allocated to transportation, including road and bridge improvement and replacement, public transit and passenger and freight rail, to mention just a few, water system upgrades (including lead pipe replacement) have been allocated $55 billion, broadband deployment to connect the unconnected has been allocated $65 billion, electric grid modernization and power generation innovation is allocated $73 billion, environmental remediation of hazardous sites and abandoned mines, $21 billion, western water storage, conveyance, repairs and upgrades: $8.3 billion, and resiliency, including coastal and flood mitigation, cybersecurity, drought and weatherization, $46 billion
Sustainable investors considering some level of exposure to infrastructure investments have a short list of mutual funds from which to choose, but the funds have a limited operating history
For sustainable investors considering some level of exposure to infrastructure investments, there is now a short list of mutual funds that, on the basis of their principal investment strategies, specifically target investments in infrastructure-related companies. These are still early days and the list per Morningstar is currently limited to four actively managed mutual funds comprised of 14 share classes that were launched within the last two years. In addition to investing in infrastructure-related companies that, for example, include renewable energy technology plants and systems that establish the funds’ sustainability credentials, the funds also qualify portfolio securities based on sustainability criteria. The criteria are either set out explicitly in each fund’s prospectus or Statement of Additional Information, or both, or via other forms of disclosure such as the manager’s website.
Each of the sustainable funds invests in equity securities, but these are not limited to securities of companies listed for trading in the US. In fact, three funds disclose foreign holdings that range from 49% to 65% of portfolio holdings¹. These funds, in turn, hedge foreign currency risks.
The four funds, managed by BlackRock, Goldman Sachs, Kayne Anderson and TCA Advisors, range in size from $10.3 million reported by the recently launched BlackRock Infrastructure Sustainable Opportunities Fund to $468.6 million attributable to the Goldman Sachs Clean Energy Income Fund that sourced 94% of the fund’s assets to various internal Goldman wealth management platforms. Each of the funds pursues an ESG Integration approach, but strategies vary. Of the four funds, BlackRock offers the most expansive and explicit form of ESG Integration by also combining exclusions and alignment with the US Sustainable Development Goals (SDGs). Refer to Table 1 as well as Table 2.
Given their short existence the funds have limited operating histories and performance track records. Over the last twelve months, returns ranged from a low of 19.2% to a high of 33.6%. This compares to a gain of 27.12% posted by the S&P Global Infrastructure (USD) Hedged Index. Refer to Chart 1. In part, performance results are hamstrung by the funds’ higher than average expense ratios for actively managed mutual funds. These range from 0.88% to 2.01% and average 1.15%, or 0.225% higher relative to a universe of 966 sustainable funds/share classes as of October 31st.
The implementation of the Infrastructure Investments and Jobs Act and its unprecedented additional spending above the current infrastructure baseline and its ambitious timetable are expected to generate significant economic benefits and investment opportunities. It will likely stimulate additional infrastructure-specific fund offerings, including lower cost options in the form of passively managed funds and potentially actively managed funds offered with lower expense ratios. Considering their limited operating history, short performance track records and higher than average expense ratios, investors may wish to limit their initial exposures to these funds. On the other hand, they may wish to consider exercising patience and instead of making an investment decision at this time, resolve to monitor these funds over a period of six-to-twelve months.
¹- The BlackRock Infrastructure Sustainable Opportunities Fund, launched in 2021 has not reported holdings as of October 31st.
Chart 1: Performance of sustainable infrastructure funds-12 months ended October 31, 2021
Notes of Explanation: Blanks indicate that fund has not been in existence for time period covered. Sources: Morningstar Direct, S&P Global
Table 1: Sustainable infrastructure funds and their sustainable investing approaches
Notes of Explanation: ^Predecessor fund with majority of institutional assets merged into newly launched fund as of August 7, 2020. While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration. ESG Integration is further divided into ESG Integration, ESG Integration-Mixed and ESG Integration-Consideration. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive. Sources: Morningstar Direct, Sustainable Research and Analysis, as of October 31, 2021.
Table 2: Sustainable infrastructure funds and their sustainable investing approaches in detail
Notes of Explanation: Sources: Fund’s prospectus, Statement of Additional Information, or both, or via other forms of disclosure, such as the manager’s website.
