How should investors approach infrastructure?

Infrastructure provides the foundation of our daily lives. For equity investors, it also offers plenty of enticing opportunities.

Infrastructure provides the foundation of our daily lives. For equity investors, it also offers plenty of enticing opportunities.

Improving and expanding the country’s infrastructure involves more than building roads and bridges. While efficient transport systems are vital, without things like reliable communications networks, safe water and a dependable power supply, the economy simply wouldn’t be able to function.

This constant need to improve the country’s infrastructure means that many companies stand to benefit throughout the process. I sat down with Peter Santoro, lead portfolio manager of Columbia Global Infrastructure Fund, to find out what investors should keep in mind when it comes to the infrastructure opportunity.
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Melda Mergen: When people think of infrastructure investment, they tend to think of roads and bridges. Should they think bigger?

Peter Santoro: In a word, yes. The demand for infrastructure applies to much more than simply building and repairing roads and bridges, as important as those aspects are. Trends linked to population growth, increasing urbanization and industrialization are spurring demand in many areas of the wider infrastructure sector.

A lot of prospects get missed by public infrastructure funds, which narrowly focus on utilities, energy pipelines and transportation assets. This restricted view doesn’t capture the full scope of potential investments. And, just as importantly, it ignores many of the fastest growing areas.

MM: What are the main themes that investors should focus on?

PS: Broadly speaking, we see significant opportunities for investment in five main areas of the market:

Equipment and materials for road, bridge and transit construction, as well as the construction of commercial and residential buildings. This includes the supply chains associated with them.
Equipment and services for the control, filtration, transportation and monitoring of water and wastewater.
Telecom equipment and infrastructure.
Engineering and service providers that build and support energy and industrial expansion.
Equipment and services to promote energy efficiency.

These are themes where there is not only consistently heavy demand, but also the ability to pay for it — typically through the private sector or public-private partnerships. People often think of infrastructure as something only municipalities and governments pay for, but there is plenty of room for private-sector financing, too.

MM: What role does innovation play in this space?

PS: Two main things drive demand for infrastructure investment. One is a constant need to repair and replace existing road and bridge networks in a developed market like the U.S.

The second, more interesting driver is social change and the evolution of technology, which is where we think there are some big opportunities.

A lot of this often goes unrecognized. Cell phone towers are replacing traditional telephone poles. Natural gas pipelines and liquefied natural gas (LNG) facilities are displacing coal trains. Underground utility networks are being built instead of above-ground electricity pylons and cables. All these changes create demand for significant infrastructure investment.

MM: How could President Donald Trump affect infrastructure?

PS: One of Trump’s most eye-catching proposals is a plan to spend $1 trillion on infrastructure. Not many of the specifics are known yet, but it’s likely to be based on tax credits to make it cheaper for private firms to finance projects that generate a positive return. Trump has also decided to press ahead with some energy pipelines — like the Keystone XL project and the Dakota Access Pipeline.

But that doesn’t mean infrastructure investment is a fad or a near-term opportunity based solely around the current president’s agenda. This is a long-term secular theme that started well before we knew
Trump would be president and which is going to play out over several decades.

In fact, infrastructure investment is one of the few issues with bipartisan support in Washington, which means it is a strong growth opportunity regardless of who is in office. President Barack Obama signed the U.S. Highway Transportation bill in December 2015, which provides for $305bn of investment over five years. And Hillary Clinton ran on a platform that advocated greater infrastructure investment too. It is something that politicians on both sides of the aisle can agree on.

MM: Is this mainly an area for long-term investment?

PS: There are often short-, medium- and long-term winners in infrastructure projects. For example, when it comes to building a highway, cement makers should benefit in the near term. The big winners longer term will be the companies that will benefit from those better roads and bridges. In terms of energy projects, it takes a long time to build a pipeline. But in the near term, the ditch diggers, the services companies and contractors will gain from more activity. In the longer term, some energy companies will benefit from using the pipelines to reach their customers.

This means there are both short- and long-term opportunities for investors. Another attractive aspect is that a lot of infrastructure projects are long-dated — they can take years to build and generate revenues for decades — and they also have heavy cash components. These factors mean they can be useful inflation hedges.

Bottom line

Infrastructure investment provides a unique combination of above-average secular growth and long-dated investments with stable cash flows and income streams. This powerful combination of capital appreciation and sustainable income provides a basis for long-term investment success.

The need for continued improvements to the country’s infrastructure is widely recognized, which means that investment is constantly happening. The fact that demand for infrastructure is consistent means it is also largely uncorrelated to the ups and downs of the broader economy. That makes it a useful point of diversification for investors.

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