Roman Aqueducts and Modern Potholes Point to This Multi-trillion-Dollar Investor Opportunity
Companies / Infrastructure Sep 19, 2015 - 05:53 PM GMTBy: ...
MoneyMorning.com 
William Patalon writes: There is nothing new under the sun. – Ecclesiastes 1:9
I'm a sucker for those "impulse buy" periodicals you always see when you're standing in the checkout line at Wal-Mart, Target, or Wegmans.
No, I'm not talking about the credibility-bending "News of the World (WWII German U-Boat Surfaces in New York Harbor – Crew Believes They're Still at War)" or any of those celebrity-chasing rags ("Insert-Name-Here Enjoys Hot Night in Hot Tub While Spouse Is on Movie Location").
I'm referring to those often-cool "special issues" that National Geographic, Time, and Scientific American seem to be doing with increasing frequency.
Just last week, in fact, I couldn't resist buying a National Geographic special called "Wonders of the Ancient World."
And I'm glad I did.
Because stuck in the middle of this slick, 130-page booklet was a feature about four "early infrastructure" projects.
Let's take a quick walk through history and look at each of the four. Then let me tell you about a move that a "smart money" player just made that spotlights a new 21st-century profit opportunity most investors aren't even thinking about right now.
The Pot of Gold in Potholes
When most folks think about "infrastructure," I'll bet that potholes are one of the first things they think of.
And I can't blame them – potholes tick me off, too.
To be clear, I'm not talking about the little ones that appear here and there as your street ages or that are the result of a highway's regular usage.
I'm talking about those kidney-jarring pits that appear after a tough winter or after a water-main break – the kind that literally bounce you off the roof of your car when you hit them at highway speeds (or a little faster).
I have an hour-long commute – twice a day (to and from the office) – and am well-acquainted with those Grand Canyon-esque highway pits of hell.
They're proliferating, which underscores a reality we face – our "infrastructure" is breaking down.
And it's not just roads. Here in Baltimore City, where my office is, the water system is on life support. More than once I've gone to our kitchen to get a cup of water only to watch something brown run out of the faucet.
And we're constantly dealing with detours as Baltimore's valiant public works crews struggle to repair the latest damage.
Baltimore isn't alone – cities across the United States are dealing with this. Surging traffic numbers mean roads and highways are being used in excess of their designed capacity. Bridges are aging. Water systems are decrepit. Parks need upgrading…
Indeed, it's a problem throughout the world as the global population continues to boom.
And it's not just repairing or upgrading old "infrastructure" – the official term for these public works projects.
You also have to add new projects into this mix. New developments – and new cities – require new roads to serve them. And new bridges. New water systems. And new airports.
This challenge isn't one limited to our modern times. Throughout history, growth has spawned the need for infrastructure projects – most of them publicly funded.
In that special issue, National Geographic highlighted four spectacular public works projects from history. And they're worth a look before we move on to the profit opportunity I'm going to tell you about – because they highlight the challenge that's creating this opening for us.
The four projects I found consisted of:
- The Great Bath of Mohenjo-Daro: In the 3rd century B.C., the Great Bath of Mohenjo-Daro (literally the "mound of the dead") was built by the Indus Valley civilization (today's India and Pakistan). Referred to by archeologists as the "earliest public water tank of the ancient world," the Great Bath measures 40-by-23 feet and has a maximum depth of eight feet. But it's the engineering that leaves folks awestruck: The floor of the purifying bath was watertight – thanks to the super-finely fitted gypsum bricks that line it and a thin coating of bitumen tar.
- The Great Dam of Ma'rib: Between 700 B.C. and roughly 580 A.D. – in the area now known as Yemen – the massive limestone dam spawned the wealthy caravan kingdom of Saba (the biblical Sheba, home of the legendary queen). The dam, which took centuries to complete, supplied 50,000 people with water, irrigated 25,000 acres of farmland, and today is regarded as one of the great feats of water-saving engineering in the ancient world. It also created a culture based on water engineering that survives to this day.
- The Roman Aqueducts: In its special issue, the National Geographic writers said "there are few pieces of infrastructure that were as revolutionary, and as enduring, as the Roman aqueducts" – which were that civilization's big public works projects from about 312 B.C. to the 5th century A.D. Rome had a few springs within its walls, but the water was almost undrinkable, and the Tiber River was pollution-ridden and disease-borne. That launched Rome into an aqueduct-building program that would lead to the construction of 11 of these state-funded water-delivery systems – some of which are still used today. The third one built – the Aqua Marcia – was the longest of Ancient Rome's 11 aqueducts, bringing in water from a source that was nearly 60 miles away. As public works projects go, it was expensive – and may have cost as much as $9 billion in today's money to build. The aqueducts supported a population of more than a million people – in a society that historians say was "water extravagant." But the building program was viewed so positively that cities and municipalities throughout the Roman Empire emulated the model of state-funded water systems. Indeed, experts say that publicly financed aqueducts were viewed as "objects of public interest and civic pride" and as "an expensive-yet-necessary luxury to which all could, and did, aspire."
- The Harbor at Caesarea: During one decade-long period (roughly 23 B.C. to 15 B.C.), local and Roman builders working for King Herod of Judaea on the coast of what is now the State of Israel constructed the biggest and most challenging artificial harbor built to that point. Indeed, The International Journal of Nautical Archaeology said "the scale and complexity of this project, along with the rapidity of its execution, are remarkable even if judged by modern standards." Using new technology – including a type of light cement that would float for a time before being sunk in place – Herod built a protected harbor of about 50 acres that soon became as large as the one at Athens. It could house 300 ships and aided East-West trade.
The "New Finance" of Public Works Projects
As the quotation I shared at the start of this report tells us, there truly is nothing new under the sun. Infrastructure projects – roads, water-supply systems, dams, and transportation hubs – were as important in the ancient world as they are today.
With perhaps one difference.
Traditionally, infrastructure projects have been the bailiwick of government – at the federal, state, and local levels. That's why these initiatives are referred to as "public" works projects. They're constructed for the good of the public – and are financed that way, too. Government entities can issue bonds to finance the projects, making it easier to raise the capital required for what are often very expensive undertakings.
But this "all-government" rule of thumb is succumbing to reality.
Governments, you see, can't afford to keep paying the freight for all these projects.
And with good reason.
Worldwide, there's a need for $57 trillion worth of infrastructure spending over the next 15 years, the McKinsey Global Institute said in a new report issued in June.
And the consultancy acknowledged "that's an enormous sum."
But there's good news.
There's a growing number of cases where governments are linking up with private-sector investors to finance these projects. That's making it possible for more of them to be built. And it's also creating a whole new venue of "alternative investments" for folks like you and me who are seeking new-and-lucrative places to put our investable cash.
Truth be told, we've been hearing about the "potential for infrastructure investing" for the past decade or so.
But a brand-new move by the "smart-money player" I mentioned earlier tells me it's time to give this a serious look.
That $57 trillion is an enormous sum, but contrary to popular belief, there is no shortage of capital. In fact, there will be more than enough as both governments and investors increase their focus on infrastructure.
Follow the (Smart) Money
Back during my days with The Baltimore Sun, I spent several years on the finance "beat." And one of the companies I covered was brokerage/asset manager Legg Mason Inc. (NYSE: LM).
And unlike many of the institutional players out there, Legg is a shrewd operation.
Indeed, it was a Legg Mason money manager – a gent named James C. Liddle – who took me under his wing during my early business journalism days and schooled me in the ways and means of "value investing" and "Contrarian investing." I embraced that way of thinking so completely, in fact, that I eventually coauthored a successful book on Contrarian investing.
Legg, through the years, has had an uncanny feel for the business of investing. A few years back, in fact, the company's savvy leaders saw that the most lucrative venue in its business was in asset management – and not in being a transaction-based broker.
So the Baltimore-based Legg agreed to swap its 1,400 stockbrokers for the mutual-fund business of Citigroup Inc. (NYSE: C). The $3.7 billion deal completed Legg's transformation into one of the biggest money managers in the United States.
As The Washington Post explained it, "Citigroup would largely exit the mutual fund business in favor of selling such funds for others [while] Legg Mason would do the opposite, concentrating strictly on managing mutual funds and other investment products and getting out of the stock-brokerage business."
For Legg Mason, it was a brilliant and timely move. The financial crisis of 2008 made it tough on brokers. Firms with assets under management – though hurt by the drop in valuations – were better off because of the "annuity stream" they received from fees based on the assets they controlled. And when asset prices recovered, those fees recovered faster than brokerage transactions.
I'm telling you this for a reason. Legg just made another move. It's another shrewd one. And it signals the burgeoning opportunity in infrastructure investing.
Earlier this month, Legg Mason struck a $205 million deal to buy Sydney, Australia-based RARE Infrastructure, a firm that invests in infrastructure companies and projects throughout the world. These projects include airports, water delivery systems, natural gas, roads, railways, and power systems. RARE has $7.6 billion in assets under management.
"It's pretty much a pure diversification play," Loyola University Maryland Finance Professor Karyl Leggio told The Sun. "This is a growth area for financial-services firms. The acquisition looks to be a good sign for the fiscal strength of Legg Mason and its foresight into directions that the market [is] moving [in]."
Thanks to super-low interest rates, a sky-high stock market, and a brutal sell-off in traditional alternatives like commodities, investors are looking for "other" profit opportunities. And infrastructure is a sound one.
"It's an asset class that's gaining a lot of traction in terms of importance in asset allocation," Mac Sykes, an analyst with Gabelli & Co., told the newspaper. "It's a good alternative for fixed income… there are a number of ways in which this would be a positive."
Our first recommendation in this area is going to be Legg Mason itself. It's not a flashy recommendation, I'll grant you, but it's solid. And Legg is a company that understands its business and has a knack for making moves ahead of market shifts. That knack has been demonstrated time and again during the 30 years I've watched, dealt with, and covered the company.
The stock is currently trading at $49. But target prices range from a low of $57 to a consensus of $63 to a high-water estimate of $67.
The move into infrastructure will give its growth a boost. And it does pay a dividend – offering a decent yield of 1.65%.
Buy 60% of your intended position here. And we'll look to add to it in the event of a market correction.
We'll also be back with additional infrastructure-related profit plays.
In fact, we're just getting started.
Have a great weekend.
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