Tired of market volatility in your investments? The returns on infrastructure investments are typically calculated over decades instead of years and have traditionally outperformed both the stock and bond markets in the long term.
If you’re unfamiliar with infrastructure investments and have thought of investing for an extended timeframe, you’ll find helpful investment ideas and interesting information about this type of investment strategy in this article below.
What Are Infrastructure Investments?
Infrastructure investments include telecommunications and port facilities, railroads, roads and highways, water networks and power generation plants, for example.
Furthermore, due to the physical nature of infrastructures, investing in the sector could be considered an indirect real estate investment, especially since most infrastructure companies start out by buying real estate. The main difference between making an infrastructure investment and an investment in real estate stocks consists of the need to assess the underlying business the infrastructure company conducts versus the underlying value of a straight investment in real estate.
Real estate investments also correlate directly with land values and are influenced by other economic forces. On the other hand, infrastructure companies have significantly less correlation with the property market and economic movements. Civil infrastructure investment also generally involves government subsidies that give investors even more incentive to invest.
Why Invest in Infrastructure Investments?
The main reason to get involved in infrastructure investments is if you wish to make a long-term investment that lacks a strong correlation to the general stock market and has some resilience during economic downturns.
This feature makes that sort of investment a hedge to other investments with more exposure to stock market volatility. Also, many infrastructure investments have general utility and government subsidies, which provide additional safeguards for your investment.
Of course, the best way to allocate assets is specific to each investor, so speak with your financial advisor to determine what makes the most sense for you. For example, an individual retiree will have different priorities than a large pension fund with respect to how they allocate funds to different investments within their portfolio.
Infrastructure investment has a special place in the investment realm. While not a pure interest rate investment like Treasury notes, many infrastructure investments will provide a better yield than government notes and bonds. Also, infrastructure investments generally remain somewhat buffered from the swings of the business cycle since infrastructures are maintained regardless of the state of the economy.
Another option that might make sense for long term investing is a real estate investment trust (REIT). Check out Benzinga’s article on how to invest in REITs and its DiverseyFund review if you want more information on adding that asset class to your portfolio.
Infrastructure Investment Strategies
Infrastructure investment strategies generally target specific industries and segments of the economy. Below you’ll find listed the different types of infrastructure, their current state in the U.S. and what strategy to use to invest in them.
Water remains an essential utility, and most of the U.S. water infrastructure is nearing the end of its current use cycle. The sector will require approximately $1 trillion to maintain and expand drinking water services, according to the United States American Water Works Association.
Many electric utilities currently operate at maximum capacity and have also reached the end of their useful lives. The future of this industry remains unclear as trends toward increasing decentralization and the introduction of renewable power generation methods progress. New energy production includes wind turbines, hydroelectricity, nuclear power and solar panels.
Waterways and Ports
These gateways in and out of a country enable the import and export of traded goods. Port authorities and their partnerships with the private sector often plan on making major expenditures to upgrade their facilities, as well as enhancing their related land-based logistics networks.
U.S. airports have significant congestion issues, which could be addressed with additional infrastructure investment.
Transportation systems throughout the U.S. face a $90 billion backlog for rehabilitation. Public transportation upgrades have been uneven, and millions of Americans still have little or no access to public transit.
Roads and Highways
The congestion-related delays on U.S. interstate highways currently cost approximately $160 billion, largely from lost time and added fuel costs. Also, 20% of the pavement on U.S. highways is considered in poor condition.
Perhaps the most traditional form of infrastructure investment consists of purchasing revenue bonds and municipal bonds issued by state, local and federal governments. This public/private partnership model has had a long and successful track record, so it continues to be used in the U.S., Australia, Western Europe and Canada. Investing in bonds is a good way to calculate a return and feel comfortable allowing the investment to mature on its own. Think of this as a hands-off approach to investing.
Investment in the telecommunications, rail, energy or healthcare sectors has been mostly privatized at this point. These infrastructure sectors could still offer opportunities to savvy investors who buy the stocks or bonds of companies operating in those industries. Remember, too, that the telecom sector is extremely diverse because some of the larger providers build their own networks, while others rely on infrastructure construction firms.
Pros and Cons of Infrastructure Investments
Investing in infrastructure may not be as sexy as putting your money into technology or cyclical stocks. Still, if you’re investing for the long term, you may benefit from infrastructure investments’ typical gradual returns over time without having to cope with the stress of high market volatility.
Keep in mind that investing generally involves taking risks, which also applies to investing in infrastructure. Below you’ll find a list of the main advantages and disadvantages of infrastructure investment.
- Defense and diversification: Investors with a long-term view allocate funds to infrastructure investments as a strategic move. Infrastructure investments serve as an inflation hedge and can be resilient even in rising interest rate environments. This makes them ideal for diversifying a portfolio, especially as the rising phase of the business cycle comes to an end.
- Income generation: Since many infrastructure investments consist of bonds, they can generate an attractive income via the interest paid. In the case of infrastructure stocks, the income comes from dividends and capital appreciation over time. Historically, the yield on infrastructure investments has typically outperformed both equities and bonds.
- Risk and reward: The market has yet to pick up on the great risk/reward ratio of infrastructure companies. This is primarily because of the fact that most of these companies have partnered with the government in long-term contracts and provide services that are beneficial and even necessary to the public. In addition, returns often rise with the rate of inflation, which makes the infrastructure investment a potential inflation hedge.
- Interest rates: One of the risks of infrastructure investing consists of rising interest rates. Higher rates could increase the cost of projects and lower the return on investment. Another related risk is the effect that benchmark interest rate changes have on a company’s borrowing costs.
- Sustained high inflation: Inflation could boost pricing pressure, reduce margins and increase construction costs, adding operational and managerial risks and affecting the company’s reputation.
- Natural disasters and geopolitical risk: These types of risks plague infrastructure investment. For example, Pacific Gas and Electric reached a $13.5 billion settlement for claims related to wildfires in California from 2015 to 2018 that were deemed caused by its equipment and prompted a sharp drop in PGE’s stock price.
- Changing technology: When you make an infrastructure investment, it may be based on cutting-edge technology that’s exciting and has true growth potential. However, changing technologies can invalidate an investment or slow the growth of an investment unexpectedly.
How Infrastructure Funds Make Money
Infrastructure funds generally diversify their investments by making investments in the infrastructure of other countries and different industry sectors and regulatory regimes. Once the infrastructure has been identified, the fund begins to acquire the infrastructure assets related to it.
The majority of infrastructure funds make money by targeting investments with the potential to add significant value. This is achieved primarily through the modeling and selection of investments using defined risk parameters and the profiling of other successful infrastructure investments.
Keep in mind that concessions on these investments could be for 20 years or more and some even have 99-year leases. The key to successful infrastructure investing as a fund manager involves selecting assets with a sustainable growth profile, which typically means that the infrastructure provider can consistently increase the price of their services over time.
Infrastructure Investment Opportunities
Mutual funds and exchange-traded funds (ETFs) offer some of the best infrastructure investment opportunities. ETFs that specialize in infrastructure investments include the Global X US Infrastructure Development ETF, the iShares Global Infrastructure ETF and the SPDR S&P Global Infrastructure ETF.
Mutual funds specializing in infrastructure investments include Macquarie Infrastructure and Real Assets, Global Infrastructure Partners and Brookfield Asset Management. If you prefer to invest in infrastructure stocks, you might consider Caterpillar, Vulcan Materials or Nucor.
You can open an account with any of the reputable brokers listed in the table below to invest in such products.
Is Infrastructure Investing Right for You?
If your investment goals aim for long-term growth, then investing in infrastructure might suit you well. Infrastructure investing is typically more appropriate for people investing for their retirement, for their children’s college funds or to attempt to get an above-average return over a long period of time.
On the other hand, if your financial goals target near-term profits, then you would probably be better off using a different investment strategy. Those who want more immediate returns tend to focus on the stock market, which can involve added risk given the current level of market volatility and the uncertain state of the economy.
Related content: Best Infrastructure Stocks
Frequently Asked Questions
Should everyone invest in infrastructure?
Infrastructure investments can be wise long-term investments. However, you must choose each investment carefully, depending on what the firm does.
Can you make money on infrastructure investments?
Yes, you can make money on infrastructure investments, but you must be patient as these investments often have little correlation to the stock market and take quite a bit of time to mature.
Are electric vehicles considered a part of infrastructure?
Electric vehicles are considered part of infrastructure because as their adoption increases, the need for charging stations and related infrastructure becomes crucial. Governments and organizations are investing in the development of charging infrastructure to support the growth of electric vehicles.
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