ETF Expert Corner

Rare Infrastructure’s Dave Wahl Spotlights Legg Mason Global Infrastructure ETF (INFR)

October 10th, 2017 by ETF Store Staff

Dave Wahl, Senior Portfolio Specialist at Rare Infrastructure, spotlights the Legg Mason Global Infrastructure ETF (INFR) and explains the case for investing in infrastructure.


You can listen to our interview with Dave Wahl by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we're spotlighting this week is the Legg Mason Global Infrastructure ETF, ticker symbol INFR. Joining us via phone from just outside Toronto, Canada to discuss this ETF is Dave Wahl, Senior Portfolio Specialist at Rare Infrastructure. Now, Legg Mason is the majority owner of Rare. Rare focuses exclusively on investing in infrastructure and they maintain the index behind this ETF. Dave, our pleasure to have you on the program today.

Dave Wahl: Thanks very much for having me. Happy to be here.

Nate Geraci: Dave, let's start by first defining what infrastructure is. How does Rare define infrastructure and can you perhaps provide us with a few examples of some of the specific sectors or subsectors here?

Dave Wahl: Absolutely. Infrastructure for us, an infrastructure asset, is just services and facilities necessary for an economy to function - very simply put. What we look at when we look globally at infrastructure, we look at the infrastructure world as being divided into four separate buckets. One, community and social, which would be hospitals, schools, housing. Two, regulated assets, which would be your poles, wires, pipes, defensive assets, low GDP exposure. Three, user pay assets. Those are concession-based contracts, and typically what people really view as infrastructure traditionally. Your roads, your rail, your ports, your airports, leveraged to GDP. And finally, four, competitive assets. And that's your higher risk, which would be unregulated supply/demand, some commodity price exposure, service companies. From a Rare perspective, we want to focus on the two in the middle, the two middle ones I spoke of. Regulated assets and user pay. From a user pay is typically what people believe, like I said, to be traditional. And from a regulated asset, those are utilities that would be a little bit more defensive and have some characteristics towards inflation. We just hope to avoid those companies like I told you, because we're looking to reduce volatility, and we're looking to really focus on cashflow from the underlying assets. So some competitors of ours in the ETF world might own a Comcast or a Verizon, we don't view that as infrastructure from a traditional aspect. From our perspective, there's three points to know about being an infrastructure asset. It has to be one, a real asset. Two, it has to be accessible and beneficial to society. And three, there has to be a construct in place to provide a reasonable return for investment.

Nate Geraci: Let's talk about the nuts and bolts of the Legg Mason Global Infrastructure ETF. This owns approximately one hundred infrastructure related stocks from all around the globe. Take us from there. How exactly is this ETF constructed?

Dave Wahl: Okay, I'll try to do it from a higher level. If we want to go deeper on any of these, please let me know and we can do that. But just from an introduction, our infrastructure index is constructed from a global infrastructure related securities bucket. It's designed to provide investors with higher exposure to quality, liquid securities that match what Rare's definition, that I just spoke of, of infrastructure is. We try to deliver the investment characteristics from the asset class, namely attractive and growing income distributions, lower volatilities and broader global equities, and lower correlation to the other asset classes. There's no real common definition of infra as it relates to sectors and industries. So what we try to do is filter the definition to construct companies that Rare considers to be of investible quality. We're interested in companies that have a majority of their business coming from the following areas, and I'll just really quickly go through. Electric, and that's transmission and distribution. Gas. Water. Communications. Ports. Rails. Toll roads. And airports. And very quickly, what we do is we take those and we divide them into two sectors, the utilities infrastructure sector and the economically sensitive infrastructure sector. And then the underlying index applies multiple screens to select those securities that investors will be provided with high exposure to high quality liquid securities that match our definition. Some of the factors that we use to select the securities are market cap and average daily liquidity. We do a screen on infrastructure exposure. We do a forward-looking dividend yield screen, and then we do an operating cashflow yield screen. And what does that come up with? It gives us a group of companies that we believe closely match the infrastructure portfolio that we would actively manage as well.

Nate Geraci: Dave, as we've mentioned, this is a global ETF. I'm curious, what does that high-level country breakdown look like right now?

Dave Wahl: From a global perspective, it is. You are correct. Right now we are about almost 50% USA and Canada. Asia developed, we are probably 19 to 20 percent; Western Europe, 25. And then a very small proportion to Latin America and Asia-Pacific developing. So it's really right now, the index is geared toward the developed nations.

Nate Geraci: And how are the holdings weighted in this ETF?

Dave Wahl: Again, they're put in these two buckets, and it's an approach based on infrastructure quality. That is really our key to it. But right now, I think the key to our infrastructure index is that we go between 60-40 either economically sensitive or utilities, based on our leading economic indicators, our dynamic weighting. So as a start at 50-50 when we did the back-testing of it, we were 50 utilities and 50 economically sensitive. Currently, because the leading economic indicators are trending positive, our portfolio's currently 60 percent to the economically sensitive bucket, and 40 percent to the utilities bucket. And that's the maximum that it can be right now to take advantage of what's going on globally.

Nate Geraci: Can you maybe provide us with two or three examples of specific companies within this ETF and what they do? I thought you did a nice job earlier of describing how you view infrastructure as a whole, but give us a more granular example, of maybe a bigger name or two that's included in this ETF.

Dave Wahl: For sure, I'll give you an example. So one of the things that we would be interested in, in North America specifically, is the rail component. It's been a large contributor to performance over the recent periods. A couple of the larger names we would have that people would be familiar with, Norfolk Southern, which we would own. CN Rail, which is a Canadian operation, which I thought I should mention, being from the Toronto area. So those are two of the rail or the GDP-related names that we would hold. We own Crown Castle, which is again, back to the example of “do we own market price sensitive companies, do we own a Verizon service company?” - no. But Crown Castle is a specialized REIT, or a tower that those companies would lease space off for their bands. Another one, if we want to go globally, Transurban is an example of a toll road in Australia that is privatized by the Australian government. We own that as well, and it's been a staple for many infrastructure portfolios. It does have a regulated return and does provide a great yield for investors. Those are three examples, I can give you some others if you'd like. But that's kind of the feel for companies that we would invest in, and contrasting what maybe others would.

Nate Geraci: Our guest today is Dave Wahl, Senior Portfolio Specialist at Rare Infrastructure. We're spotlighting the Legg Mason Global Infrastructure ETF, ticker symbol INFR. Dave, you began to allude to this earlier, but as I'm sure you're aware, there are several other global infrastructure ETFs out there, including an iShares Global Infrastructure ETF. There's a SPDR Global Infrastructure ETF. What are some of the key differences with INFR?

Dave Wahl: I tried to explain very briefly for you guys the methodology around our infrastructure index and how we construct it. I'll give you an example, or some key points, I think, that differentiate us when it comes to those two names especially. And they both follow the same index, the S&P Global Index. So the S&P would use GICS sub-industry sectors to classify infrastructure. It's broader or more general than our exposure score methodology. What it comes down to is they bucket their names into 40% industrials, 40% utilities, and 20% energy at all times. They do regional requirements as well, which we do not, other than maximums. They require 15 emerging market names out of the 75 total that they use. There's no screens to further identify the quality of infrastructure, and there's no dynamic weighting like I spoke of, where it becomes 60-40 or 40-60 economically sensitive versus utilities, that's not included as well. Historically, it's been a higher risk beta strategy, the S&P Global infrastructure, and it's probably because of the little bit looser infra definition, and higher energy weighting. Our cashflow and volatility screens probably further ensure their risk profile looks more like infrastructure, like we're trying to achieve. I'll give you an example. Right now, approximately 30 names in the S&P are not in our index, and we have some that are in ours that aren't in the S&P as well. S&P would have little exposure to rail or communications as well. So there are some differences, for sure, that you might want to be aware of.

Nate Geraci: Dave, with the remaining time that we have today, let's talk about the potential investment opportunity here and perhaps we can start with the US. Obviously, we've all heard a lot about a possible major infrastructure spending bill coming from the Trump administration. How big of an impact might that have in terms of being a positive catalyst for companies within this ETF?

Dave Wahl: Well, for us, and it has been a popular discussion in many of the meetings in travel across the country, and globally, that I'm speaking about, is if the Trump administration and the policies don't get put through, or they're not as great as they thought they were initially, what kind of impact will that have on our portfolio? Really, what Trump's administration is talking about is an infrastructure build. It's a construction company, service company, things that probably wouldn't impact our portfolio anyways. Like I said, we do have a large exposure to North America, almost 50% in our portfolio currently. So the impact of the Trump administration isn't going to be that great, but where we do find opportunities currently is in all kinds of broad areas like I spoke of earlier, with rail, with pipelines. We have energy companies. So we do have a lot of exposure to the US. I think what's really important to happen in the US is as these projects are built and as a toll road is constructed, or as the government puts in policies and regulations that allow for a regulatory environment for privatization of, example, a toll road, once that happens, and perhaps replicating what goes on in Europe and other parts of the globe, Australia. When that happens and there is confidence in infrastructure investing, we believe that with the secular growth and the need for private capital and government cooperation, we think that's when the real explosion in infrastructure investing will occur.

Nate Geraci: You mentioned North America accounts for about 50% of this ETF’s holdings, and you also just mentioned Europe and Australia. Can you offer some color on investment opportunities elsewhere and maybe particularly in emerging markets? What does the potential upside look like in places like Europe and Australia, and even places like Brazil and China?

Dave Wahl: So from an emerging market perspective, that's a great question. Infrastructure is unique in that the way we view infrastructure and cashflow as a real asset - when you are looking at the emerging market world and you currently don't have a lot in the emerging market region, but if you are looking at it, it does provide a pure emerging market play when you're dealing with a utility in an emerging market area, or a water utility, or anything that provides cashflow off the asset that are specific to that country. So there's tremendous opportunity in the emerging market. The only things you're concerned with around the emerging market is there's political risk. There's regulatory risk that's probably a little bit more enhanced when you're dealing with the infrastructure asset.

Nate Geraci: Dave, we have just about three minutes left here. If we pull this all together, where does an ETF like INFR fit in an investor's portfolio?

Dave Wahl: I think that, and people generally talk about, there's overlap with global equities when you're dealing with an infrastructure portfolio. I believe that the screening that we're talking about, and the characteristics that you're looking for when it comes to what does an infrastructure portfolio provide, and it provides downside protections, lower volatility, stable income and predictable growth. It provides an inflation hedge. You're screening for those things, and you have that in a concentrated portfolio as part of your equities, it does provide those characteristics in a much greater fashion. And we believe that an allocation of between four to seven percent is probably a very good start, and will provide a meaningful investment opportunity.

Nate Geraci: Dave, lastly here, I'm curious from your perspective, how do you think ETFs have changed the way retail investors access infrastructure?

Dave Wahl: Yeah, I think that's a great question, and it deserves an answer for sure. When you're looking at what's gone on in the past when it comes to infrastructure investing, it typically was a very large cash outlay, it was a very long time horizon, and it was something that was usually available to the very largest institutions globally. ETFs have allowed for that listed portfolio that, over a three to five year period, will replicate the characteristics that you would get from an unlisted portfolio, or the same characteristics that the very largest institutional investors will get, and provide all those same characteristics that we talked about; the lower volatility, downside protection, inflation hedge, and stable and predictable growth and income that wasn't accessible in the past.

Nate Geraci: Dave, with that, we'll have to leave it there. Excellent spotlight today. We certainly appreciate you joining us on the program. Thank you.

Dave Wahl: I enjoyed it. Thanks very much for having me.

Nate Geraci: That was Dave Wahl, Senior Portfolio Specialist at Rare Infrastructure. Again, the ETF is the Legg Mason Global Infrastructure ETF, ticker symbol INFR, and you can learn more about this ETF by visiting, that's