The appeal of infrastructure investments
Peter Lynch, the legendary U.S. mutual fund manager, used to advise investors to focus on boring industries that meet day-to-day needs. His reasoning: those businesses are easily understood and largely immune to the economic cycle.
"Boring" industries are now some of the most talked-about investments around. Have you ever imagined owning part of a water and sewage system? How about a tunnel, toll road, electrical grid – or even a prison? Those are just the kinds of things that specialty and diversified mutual funds are buying today on behalf of individual investors.
The private sector, institutional investors, and stock markets are all playing a larger role in funding infrastructure. On the supply side, governments are selling outdated facilities that need to be upgraded, replaced, or better managed. Opportunities are global, from industrialized nations to emerging economies.
On the demand side, pension funds and institutional investors such as life insurers see infrastructure investments as a good match to help fund their long-term liabilities.
As one example, the Canada Pension Plan Investment Board (CPPIB) says an established toll road has similar risk-return attributes as government bonds, utility stocks, or a well-located Class A office building. CPPIB considers these four types of assets as potentially interchangeable.
Such big money investors – who commit billions of dollars over decades – began investing in infrastructure in the 1990s. Now, an array of infrastructure-related investment funds has opened this market to individual investors, primarily those with a longer time horizon.
Many infrastructure projects include the right to provide a monopoly or near-monopoly service with regulated rates. This can create stable cash flow at relatively low risk, a hedge against inflation, and low correlation with conventional stock and bond markets. An infrastructure asset might also increase in value.
But there are vulnerabilities. Some of the most lucrative infrastructure investments – so-called "greenfield" projects to create new facilities – may carry environmental risk and cost more than expected. And there can be political risk if rates and markets are regulated by governments.
Infrastructure ownership and management agreements run a long time – often 99 years. This ensures long-term income, but also means a lack of liquidity. Mutual funds overcome this since fund units are valued and redeemable daily, making it possible for individual investors to participate.
You may already own it
In Canada, there are a number of infrastructure mutual funds available directly from financial advisors. There are some funds closed to new investors, while others are exchange-traded and listed on the stock market.
You may even already have exposure to infrastructure investments within your diversified mutual funds, through companies involved in development or operation. In addition to engineering and construction firms, the field includes building materials manufacturers, aggregate producers, logistical support contractors, and specialized financial companies.
If you are interested in exposure to this type of asset, we can help you determine your optimal portfolio weighting. Or, if you hold broadly diversified funds, we can tell you more about their infrastructure exposure and strategy.
Contact your BlueShore Financial financial advisor today to review your portfolio and create the best investment strategy for you.