How to work infrastructure funds into clients’ portfolios

Worldwide, infrastructure spending is expected to grow to over $9 trillion per year by 2025, up from $4 trillion in 2012. Overall, global spending on transportation, power generation, telecommunications networks, public facilities and other infrastructure over the next decade is estimated at nearly $78 trillion.

While this building boom potentially will drive economic growth and job creation in many regions, it can have an equally powerful effect in building wealth for investors who make infrastructure a core holding in their portfolios.

For the past few years, questions have been raised about whether infrastructure is truly an asset class. As infrastructure represents a distinct set of assets, that issue seems largely settled. However, it is important to ask how financial advisers and their clients can best allocate to this increasingly important class.

3 DISTINCT ALLOCATION STRATEGIES

At Alpine Funds, we believe that investors who seek to benefit from the global infrastructure boom should consider three possible allocation strategies: 1) shift some emerging market exposure to more stable infrastructure holdings; 2) employ infrastructure funds as a part of an income portfolio; or 3) consider it as a separate thematic investment. Which of these approaches clients and their advisers choose will, of course, depend on specific investment objectives and risk tolerances.

The case for allocating to the infrastructure class reflects, in part, powerful global demand. Much of the expected growth in spending will come from the Asia-Pacific region, where emerging middle-class consumers and increasingly urban populations are creating a vast need for water, transportation, energy and telecom projects.

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Even in the U.S. and other developed countries, the need to upgrade aging airports, roads, bridges and power grids is acute. Additionally, infrastructure investments can be attractive income vehicles, as most projects are structured with specific revenue-generation components. Given the potential benefits of infrastructure investment, let’s look at the different allocation strategies in more detail.

DIVERSIFIER FOR INTERNATIONAL EQUITY PORTFOLIOS

Investors holding international equity portfolios may want to allocate to infrastructure funds to diversify exposure in what has recently been a volatile asset class. Many international funds, especially those focused on emerging markets, are overweighted in commodities and the financial sector. For investors who still want some exposure to emerging markets, global infrastructure is a viable option because it’s supported by solid demand and is uncorrelated with other asset classes such as commodities or financials.

INCOME VEHICLES

Shares in an infrastructure fund are equivalent to “owning the owners” of revenue-generating assets. Yield is produced by a relatively dependable stream of income from toll road concessions, water usage charges, airport landing fees, etc. This makes allocating to infrastructure funds a logical choice for investors who want to invest globally and yet also receive dividends or income.

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THEMATIC INVESTMENTS

Finally, infrastructure funds may make sense for investors who wish to capitalize on major global themes, such as the emerging middle class or urbanization. Global infrastructure provides more direct exposure to these trends than more generic thematic plays, such as international investing.

The potential drawbacks to infrastructure investing include interest rate risk, as a rise in real rates could impact economic returns. Political and regulatory decisions can also affect the support for or returns on infrastructure investments.

That said, for investors who believe an allocation to infrastructure makes sense, a global infrastructure mutual fund may be the best alternative. Private equity infrastructure funds are generally illiquid and are not accessible to most investors, while infrastructure MLPs can complicate one’s tax filings.

Infrastructure mutual funds provide relatively liquid, simplified vehicles for accessing a diversified portfolio of infrastructure projects, helping investors to potentially build a road to their financial goals.

Joshua Duitz is a senior portfolio manager at mutual fund provider Alpine Woods Capital Investors