Many new U.S. infrastructure funds are designed to offer investors the possibility of higher income in exchange for taking some additional risk.
Both U.S. presidential candidates — who agree on little else — have expressed strong support for increasing federal infrastructure spending.
The infrastructure investment sector is generally doing well, offering growth, income and diversification superior to many equity and fixed income product. But with this kind of highly publicized, bipartisan political will behind it, it may be poised for explosive growth.
Financial advisers and investors who are not familiar with this sector should give it a fresh look, now, so they can take advantage of the many strong investment opportunities that may follow.
This could bring much-needed repairs to our aging roads, bridges, tunnels, railroads, airports and seaports, as well as funding daring new projects. Of course this assumes the sharply divided U.S. Congress will go along with our next president's wishes — despite rejecting similar initiatives from President Obama — but the time may have arrived for consensus. Economists of every stripe agree that we need the new construction, and the solid investment opportunities that go with it.
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Yet in this political climate, to accomplish all the projects that have been proposed (with many more to come, no doubt), at least some of the vast trillions of dollars required will have to come from sources beyond the U.S. government: private capital will be needed. This will necessitate a change in financing, breaking the monopoly of municipal bonds and moving towards a private investment model that is already been well-established in Europe, Asia and Australia.
Retail investors are showing increased appetite for infrastructure funds, which were once limited to institutional investors and high-net-worth individuals. Compared to equities, they can offer:
• Attractive income potential from high dividends
• Long-term growth potential
• Lower volatility potential
• A degree of inflation management
• Lower correlations to equity indexes
• Portfolio diversification
• Good risk/return possibilities
Many of the new U.S. infrastructure funds are designed to offer investors the possibility of higher income in exchange for taking some additional risk that they might get in U.S. government or other sovereign bonds. This can make these investments attractive to retirees, those close to it, and others who want or need enhanced income potential.
U.S. infrastructure funds already hold stocks with over $2 trillion in market capitalization. About 35% is in domestic utilities, 25% in other countries' utilities, and 40% is in “user pays” infrastructure (which are generally airports, seaports, toll roads, railways and communications towers). The lion's share, around 65%, is invested in non-U.S. projects.
Even if large new projects do not come online from the U.S., there should be no shortage of infrastructure investment opportunities for the foreseeable future: global infrastructure assets are estimated to be valued at $50 trillion, which is projected to rise to over $110 trillion by 2030.
In May 2016, the American Society of Civil Engineers projected that between 2016 and 2025 the U.S. will need $3.32 trillion in new infrastructure spending. Under the current system it expects a funding gap for that period of $1.44 trillion, with the biggest shortfalls in roads and mass transit. Private capital can fill this gap, serve the public good and create opportunity for investors.
That augurs well for the many retail investors having a hard time finding income and growth in these uncertain markets, with relatively low risk profiles. We can use a greater supply of these attractive investment options, since interest in investing in this sector is growing at a rapid pace.
Most funds now invest in foreign projects, often in emerging markets, which can be difficult for investors to assess. This is not an area for blind-faith investing: every project is not the highest quality. Asset managers must do the research, visiting with companies, regulators and financiers to judge the true value of the underlying assets, and recognize the many risks.
Most large infrastructure projects take at least five years to plan and build, so these should not be viewed as short-term plays. We suggest that you consider investing a portion of your portfolio with conviction in infrastructure assets and holding them through regular market cycles. When more similarly solid opportunities come on-line, hopefully within the U.S., be ready.
Hey, if Donald Trump and Hillary Clinton can agree on this one way to “Make America Great Again,” surely we embrace the resulting opportunities to help investors — and our country, too.
Thomas Hoops is head of business development at Legg Mason
