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The infrastructure sector is benefiting from enormous tailwinds, perhaps none greater than the significant demand coming from leading billionaire investors. With this in mind, we will be comparing two of the highest yielding infrastructure funds available in the market today: the Reaves Utility Income Trust (NYSE:UTG) and the Cohen & Steers Infrastructure Fund (UTF) and share our thoughts on which is the better buy at the moment.
Infrastructure Tailwinds
Before we compare the funds, let’s first discuss the tailwinds boosting these sectors. First and foremost, the global infrastructure outlook recently projected that there is an $18 trillion investment shortfall based on current projected infrastructure investment needs by 2040. This is largely being driven by the fact that, as Brookfield Asset Management (BAM)(BN) puts it, there are five “Ds” causing demand for new infrastructure investment to soar:
1. Aging populations, which are driving increased demand for infrastructure investments that pay stable and generous cash yields.
2. Rapid economic growth in places like Southeast Asia and Latin America, which requires significant infrastructure buildout to provide for basic needs in society, like electricity and drinking water.
3. Rapid digitalization of the world, with the AI boom and overall industrial revolution.
4. The deglobalization trend, whereby manufacturing, especially critical supply chain items, is being moved out of China and diversified away from Taiwan into other regions of the world. These efforts are being spearheaded by the likes of Taiwan Semiconductor (TSM), ASML (ASML), Samsung (OTCPK:SSNLF), and other leading technology companies. Even Tesla (TSLA) recently began moving some of their critical supply chain manufacturing away from China.
5. Decarbonization, which is driving enormous investment into renewable power production as well as increased clean fossil fuel production in the form of natural gas. Nuclear energy should also experience a tailwind in the coming years.
As a result, it is not surprising that the likes of Larry Fink of BlackRock (BLK), Bruce Flatt of Brookfield, Stephen Schwarzman of Blackstone (BX), and even Warren Buffett of Berkshire Hathaway (BRK.A)(BRK.B) are pouring billions of dollars into the sector. They are positioning their businesses to profit from this humongous investment trend.
Another major tailwind that should boost the sector in the not too distant future is the increasing likelihood of declining interest rates. Europe is expecting to see its central bank, the ECB, cut interest rates on June 6th. The Bank of Canada is expected to cut rates soon as well. The Fed is probably going to cut at least once at some point this year, and maybe even more, depending on where economic data heads, as data increasingly points to a weakening economy in the United States. Falling interest rates should boost infrastructure development as well as infrastructure asset valuations, as they’re often viewed as a bond proxy due to their high and stable yields. Moreover, development is largely boosted by lower interest rates, which means a lower cost of capital that fuels increased investment.
UTF Vs. UTG
So with this bullish backdrop in view, which is a better investment? UTF or UTG? At the moment, UTF trades at a slightly lower premium, standing virtually in line with its current NAV at 0.13%, whereas UTG trades at a 0.86% premium, essentially making them identical funds. Having said that, UTG has a slight edge in terms of distribution rate at 8.1% compared to UTF’s 7.93%. Both pay out monthly distributions that have been held steady for quite some time. UTG even has an impressive distribution growth streak.
When it comes to leverage, UTG has about a 10% or 1000 basis points lower leverage ratio at 19.44% compared to UTF’s 29.61%. Moreover, its expense ratio is lower at 0.93% compared to UTF’s higher 1.39% expense ratio. When it comes to their portfolio breakdowns, UTG is a bit more concentrated in utilities, with 73% of its portfolio invested in utilities, whereas UTF is only 40.64% invested in utilities. Additionally, UTG has much less exposure to fixed-income investments, whereas UTF has about 20% of its portfolio invested in bonds, preferreds, and convertibles. So in total, UTF is a more diversified fund with greater exposure to other infrastructure asset types as well as fixed income, whereas UTG is much closer to a pure play on utilities, though it does have some exposure to the broader infrastructure space.
Overall, if we had to pick one at the moment, it would be UTG if we were purely focused on maximizing total returns. This is because it has a meaningfully lower management fee, lower risk due to its lower leverage ratio, offers a higher distribution yield, has a more impressive distribution growth track record, and its current premium to NAV, though slightly higher than UTF’s, is actually roughly in line with its 52-week average, whereas UTF’s 52-week average shows it trades at a 1.82% discount to its NAV. Additionally, UTG has traded in a much tighter range relative to its NAV than UTF has, so we see much lower downside risk for the fund.
Investor Takeaway
While we did recently name UTF one of the two funds we would pick if we were to retire with only two funds, we did so because it is much more diversified by sector and also has fixed income exposure, making it more suitable for a more concentrated portfolio. However, on a purely total return basis, we prefer UTG.