A Building Affair

From Mumbai to Beijing to Jakarta, the pace of Asia's economic boom is a frantic one. China’s economy is expected to grow by a whopping 11.4% this year. India is on track for an 8% expansion and Indonesia is projecting growth of 6.3%. Skylines are dotted with half-built skyscrapers, new factories and industrial parks, and power lines clutter city streets.

Beijing, China
Beijing, China

And with this expansion, comes the urgent need for roads, communication systems, housing and schools to sustain this economic growth – in short, infrastructure.

Infrastructure is the lifeblood and the nervous system of every successful economy. Highways, whether they are of the physical or electronic kind, make capital flows and trade in goods and services possible – they link people to economic activity. Access to good infrastructure systems encourages entrepreneurship, investment and overall economic activity.

Economic power house China has slated 20% of its gross domestic product (GDP) for infrastructure projects -- no small amount considering that China’s GDP for 2006 came in at almost $10 trillion.

The World Bank estimates that the developing East Asian countries will need between $1.2 trillion and $1.5 trillion in investment in infrastructure until 2010, just to cope with economic growth.

It’s this connection between economy and infrastructure that should get investors excited.

The Fund

"Infrastructure is only now beginning to catch up", says UOB Asset Management's Mark Tan, noting that there will be a "much greater need for infrastructure to keep pace with economic growth in Asia."

United Asia-Pacifc Infrastructure Fund

Fund Size S$129.19 Million
NAV S$1.325
Minimum Investment S$1,000
Management Fee 1.5% per annum
*As of 28 September 2007

Casting a wide net, UOB Asset Management's United Asia-Pacific Infrastructure Fund is hoping investors will buy into the build-up. UOB's view is that infrastructure ranges from the building materials to construction companies to the asset operators as well as the energy space that provides power to those projects.

In an attempt to diversify the fund's holdings, investments have been made in both slow-growth and high-growth countries. Top holdings by countries include China, Singapore, and South Korea. Its more dependable investments in countries like Australia help to lessen the impact of riskier choices.

However, it is the high-growth areas like China, that grab the most attention. Xiamen International Port, China Infrastructure, and China Coal Energy are all reaping the benefits of an infrastructure boom - and they are all top holdings of the Infrastructure Fund.

UOB's China position is one that aims to be comprehensive. Dismissing the build-up to next year's Beijing Olympics, Tan says there are other, more lucrative places to invest. “Our position going forward is to focus on China's second-tier cities. We're looking at stocks with more than just a big city focus, we're looking nationwide.”

And that makes sense. China has a huge hinterland that has yet to be developed.

Chinese companies may make up the largest portion of the United Asia-Pacific Infrastructure Fund, but India is also generating buzz. Valuations of Indian infrastructure firms are cheap, and the fund's managers say the country is going through a multi-year spending trend.

India’s prime minister Manmohan Singh says the country requires investments of $320 billion in infrastructure by 2012. “Our growth potential will be realized only if we can ensure that our infrastructure does not become a severe handicap,” Singh said at a conference on infrastructure last year.

Singh’s government is scrambling to meet a 2012 deadline to build 30,000 miles of road. While still a small portion of the fund overall, UOB is planning to increase its India holdings and is positive on the long-term outlook there.

The Affair

The trends so far look good. The United Asia-Pacific Infrastructure Fund is up 25% since its launch in September 2006 and UOB foresees a strong trend in infrastructure spending across Asia. But investors have reason to be wary of risk. Examples of shoddy construction in public works projects abound, where cost and speed win over quality and safety.

A $218 million bridge project in Vietnam came to an abrupt halt in late September after it collapsed, killing 54 people and injuring at least 80. In China, a subway tunnel under construction caved in last spring, killing six, and prompting accusations of a cover-up.

UOB is quick to point out that it conducts extensive research to avoid questionable investments. “You have to look at the brand of the company and the execution as well as the status within the country," says Tan, "We'll stick with bigger and more well-known construction companies."

The Fund’s managers emphasize that the infrastructure build-up in Asia is not cyclical, arguing instead that it is a long-term sector trend that will continue for at least five more years.

"It's something you're in for the long haul", says Tan. For shareholders, that means an investment story with a promising future.