Brad Solomon, Junior Investment Analyst
The aphorism “there is no free lunch” is one of those handy phrases used ad-nauseam in Economics courses. The seductively tasty platter currently set in front of investors is a lightning-fast reallocation of assets towards stocks that should “clearly” benefit from a Donald Trump presidency. Often, however, it pays to be a skeptic. I’m not critiquing the efficacy of the policies themselves towards promoting Americans’ well-being; I’m talking about the need to unhurriedly assess the second-level investment implications of policy and whether they have already been discounted into asset prices.
The ascendancy of the Trump administration and the degree to which President-Elect Trump will remain wedded to his campaign rhetoric have a number of moving parts. Now may be an opportune time to patiently exercise what Howard Marks of Oaktree Capital calls “second-level thinking”:
First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
At Brinker Capital, we believe that second-level thinking is best nurtured by asking questions. Trump’s vision is to “transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth.” The number touted by greatagain.gov is $550 billion, and a recent paper by senior Trump advisors, Wilbur Ross and Peter Navarro, calls for spurring $1 trillion in privately-financed infrastructure investment over the next decade through use of tax credits. Buy infrastructure seems to be the screamingly obvious investment implication, but here are a few less obvious questions:
Is our infrastructure actually “crumbling?”
The American Society of Civil Engineers (ASCE) gave America’s infrastructure a “D” in its 2013 report card. But coming from a professional trade organization of civil engineers, that’s probably akin to asking the cows from the Chic-fil-A commercials whether they prefer beef or chicken. Policy analyst Mark Scribner calls this the “Great Infrastructure Myth” and notes that the number of structurally deficient bridges has been declining for over two decades while pavements have become smoother in aggregate. A recent piece by Deutsche Bank Research argued that infrastructure spending in the U.S. is not, as commonly assumed, lacking:
- When using infrastructure-specific price indices, the share of real government investment to output has been stable for much of the last three decades.
- After taking into account compositional changes in private capex, business investment has also remained steady as a percent of output.
How much “leakage” is there to the transmission mechanism by which government spending boosts profits in the private sector?
Investors would be wise to examine the intended and realized consequences of President Obama’s $840 billion American Recovery and Reinvestment Act (ARRA) of February 2009, much of which was directed towards infrastructure. Michael Grabell’s 2012 piece “How Not to Revive an Economy” provides a sobering look at what led President Obama to admit that “there’s no such thing” as a shovel-ready project.
Which subsectors are winners of increased public spending on infrastructure?
Infrastructure is a blanket term that encompasses a large array of systems: energy, transit, ports, aviation, levees, dams, schools, roads, inland waterways, public parks, rail, bridges, drinking water, and waste treatment. Twelve of the 16 sectors reviewed on the ASCE’s 2013 report card received a grade of “C” or worse. Narrowing in on two subsectors, what evidence exists that Trump will favor oil and gas over renewable energy, for instance, and will he possess the means to undo the renewable energy investment tax credit (ITC) that was recently renewed in December 2015?
Okay, you’ve decided to buy an infrastructure fund. What’s under the hood?
There are 18 open-end funds focused on infrastructure and 15 ETFs with “infrastructure” in their name. Let’s say that you’ve set your sights on one of the larger ETFs in the group focused on income-generating infrastructure equities. By sector, utilities comprise 49% of the ETF, not uncommon for other members of the group. Is that an allocation you’re comfortable making? The Committee for a Responsible Federal Budget projects that the Trump administration’s plans will increase the national debt by $5.3 trillion, to 105 percent of GDP by 2026. Profligate deficits tend to have the effect of raising benchmark interest rates, and high-yielding utility stocks have traditionally been rate-sensitive instruments.
The investment world lends mythical status to the “contrarian” who takes out-of-favor positions. But standing out from the crowd is also possible simply through exercising patience and requiring a fully fleshed out view as precedent for making a judgment.
Our founder, Chuck Widger, provides timeless advice in his New York Times best selling book entitled, Personal Benchmark: Integrating Behavioral Finance and Investment Management, that helps advisors and investors stay the course in times such as these:
What this boils down to is that advisors must develop and oversee the execution of an investment strategy that anticipates the inevitable potholes and stays the course of efficiently compounding the investment portfolio to create purchasing power. This requires both the management of the investment portfolio and the management of investor behavior. Skilled, experienced advisors know that one of their most important responsibilities is to help investors avoid making emotional decisions when volatility is high or when markets are irrationally exuberant.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.
 Marks, Howard. “It’s Not Easy.” Oaktree Capital Management. September 2015.
 Ross, Wilbur & Peter Navarro. “Trump versus Clinton on Infrastructure.” October 2016. Specifically, the paper assumes projects are funded by debt and equity at a ratio of 5:1 and proposes to award a tax credit to the equity investor at 82% of the equity contribution or 13.7% of the project cost, and then tax the labor component of construction and the contractor’s pretax profits to bring the program towards revenue neutrality.
 American Society of Civil Engineers. “2013 Report Card for America’s Infrastructure.” March 2013.
 Scribner, Marc. “The Great Infrastructure Myth.” Competitive Enterprise Institute. November 2016.
 Tierney, John. “America’s Fiscal Consensus—A Bridge Too Far.” Deutsche Bank Research. October 2016.
 Grabell, Michael. “How Not To Revive an Economy.” The New York Times. February 2012.
 Committee for a Responsible Budget. “Promises and Price Tags: An Update.” September 22, 2016.