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Investing in infrastructure – building in popularity

In the fourth and final part of this series on alternative investments, Investment Analyst Jonathon Curtis explores the infrastructure sector.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Please note that this article is not personal advice and if you’re unsure that an investment is right for you, seek advice. All investments fall as well as rise in value, so you could get back less than you invest.

What is infrastructure?

Infrastructure is the essential things that allow a society to function. It includes the transportation, energy, communication, water and waste networks – everything from satellites orbiting in space, to road networks criss-crossing the globe, to underground oil & gas pipelines. The largest infrastructure project in history is currently underway with China’s Belt and Road Initiative.

It’s also helping us to become more sustainable for the future, through renewable energy infrastructure such as wind and solar energy projects.

The global infrastructure sector has been growing for many years and is expected to continue getting bigger in the future. Yet for many everyday investors it’s been off their radar. That’s changing though as the sector is growing in popularity.

Should I invest in it?

The demand for infrastructure services is generally fairly constant – it’s unlikely people will stop using energy or communicating, and current transport and travel restrictions won’t always be in place. Therefore infrastructure is arguably less affected by economic ups and downs than company shares and bonds.

Investing in this sector could also help shelter against inflation. Infrastructure companies often have little to no competition so can increase prices without affecting demand much.

Income is a key consideration for many investors, and many infrastructure companies have been steady, dependable payers of income with healthy yields. Although there are no certainties as we’ve seen recently. The enormous construction and maintenance costs of infrastructure also mean it can take several years for companies or projects to turn a profit, and there’s no guarantee they ever will.

Due to the cost and importance of infrastructure projects, it’s common for there to be government involvement. That can be a good thing, as governments are often reliable, long-term partners with deep pockets. But that involvement usually comes with regulatory scrutiny and in extreme cases governments could even nationalise infrastructure projects and companies, which could be a bad outcome for investors.

Because of the scale and impact of infrastructure, if things go wrong they can have dire consequences not just for the companies but for society as a whole. This could lead to huge lawsuits or even having operating licenses revoked. Recent examples include the 2017 and 2018 California wildfires caused by broken electricity cables and the 2018 Genoa bridge collapse.

Infrastructure investment performance

The infrastructure sector has performed better than the global stock market over the long-term*. Delving a bit deeper though the picture is a mixed bag. Water utilities, and road and rail have been among the strongest performers. Energy infrastructure has been the weakest, although renewable energy has done much better. Infrastructure investment trusts have also not done as well as the stock market over the past decade. Remember past performance isn’t a guide to the future.

More recently infrastructure has also held up better than the global stock market amid the pandemic crisis*. Similarly to the long-term picture, there have been stark differences in fortunes.

Telecommunications towers have done well from the surge in bandwidth use due to people streaming entertainment and video-conferencing while at home in lockdown. The ever-present demand for water, light and heat also meant utilities have done better than the broader market.

Unsurprisingly, airports have been hit hardest, as air travel has almost ground to a halt during lockdown and quarantine measures. Oil & gas pipelines have also suffered from both reduced demand for oil and the fall in oil prices. This is a very short and unusual period of time though, so future long-term performance could be very different.

Infrastructure sector vs global stock market over 10 years

Scroll across to see the full chart.

Past performance isn't a guide to the future. Source: Lipper IM* to 30/04/2020.

How to invest in infrastructure

Many investments in infrastructure work like private equity. There’s no listing on any stock market and they require large sums, out of reach for most everyday investors. One way to get around this is to invest in specialist infrastructure investment trusts. They’ll pool investors’ money and use their expertise to invest in a number of projects and companies they think will make good long-term investments. They’re also a good fit for the less-liquid nature of these types of investment.

Some infrastructure companies are listed on the stock market though. That means investors can invest directly in their shares. If you don’t have the time, energy and expertise to analyse the companies, you could consider funds investing in listed infrastructure companies. Infrastructure shares can perform more similarly to the broader stock market than private infrastructure companies though, so they might not offer as much diversification benefit.

Search for infrastructure investment trusts

Search for infrastructure funds

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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