Allocating a portion of your investment portfolio to Infrastructure

At a recent Infrastructure conference at the New York Society of Securities Analysts, investment professionals discussed the opportunities for investment in infrastructure projects.  Here are some of their salient points for investors:

First, what is infrastructure?

Infrastructure projects can range from bridges, roads, ports, power plants, railroads, electricity or water delivery projects, oil and energy pipelines.  Hospitals are sometimes added to the infrastructure category, especially if they are located in an emerging market.  Telecom investment too, can be considered infrastructure investment in lesser-developed economies.  Africa was frequently mentioned as an opportunity because the majority of the continent lacks electricity.

Why is infrastructure an important part of asset allocation?

The performance of Infrastructure investments is independent of financial markets and can therefore, lower the overall risk of an investor’s overall portfolio.  Because projects are inherently long-term due to multi year schedules to plan, build, and finance (click here to see the Tappan Zee replacement project), investment returns need to be evaluated on a project or multiyear basis.  It behooves the investor to be patient until a project is completed and operational for the bulk of the investment returns.

Financing long-term projects can be complex and the way they are paid for is changing.  Historically, municipal bonds raised the revenue for public projects.  Post global financial crisis, however, public and private partnerships have become a more popular vehicle for raising funds.  Conference speakers noted that pension funds, for example, find infrastructure investments an attractive way to earn long-term positive returns in a low-interest rate environment.  They may join forces with a public authority as a partial investor or be part of a group of private investors.

State of infrastructure in the US – and how the investor can benefit

The US has fallen behind in infrastructure spending, both for maintenance and new projects.  While municipalities have historically financed projects on their own – thereby avoiding the Federal government log-jam – even cities are facing voter pushback.  In America, local governments pay for most infrastructure projects and repairs – while in other developed countries, such as Canada and Australia, centralized authorities authorize and finance costs.  On a per capital basis, the US spends far less than developed counterparts.  One speaker noted that the US spends $1200 per citizen annually, far less than the $2000 spent in Canada or $2400 in Australia.  In 2012, for example, the US government spent under $100 billion on infrastructure projects while spending $678 billion on defense.  In contrast, China spent $150 billion on infrastructure projects and $250 billion on defense.  Clearly we are piling up projects that have to be done sooner or later!

How to invest in infrastructure?

Several of the largest fund families have launched mutual funds and there are also several ETFs[1] that specialize in infrastructure investments.  Another way is to invest in companies that specialize in supplying the parts or logistics for infrastructure projects.  Most importantly, remember that this is a long-term investment theme, so consider your long-term strategic asset allocation when investing, rather than making a judgment on short-term performance..