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Investing in infrastructure – the pipeline for diversification?

In the second of our three-part series on alternative investing, we take a closer look at infrastructure, how it’s performed, the opportunities for investors and share 2 investment ideas.

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.

Infrastructure connects society and provides the foundation upon which economies are built. It includes everything from transportation and utility networks to pipelines and satellites orbiting the earth. Without it we wouldn’t be able to transport goods, power our homes, travel or even communicate with the rest of the world.

The global infrastructure sector is growing and its likely we could continue to see this growth in the future. Infrastructure’s needed to support things like the transition into a carbon neutral economy and help deal with an increasing global population. It will also be needed to help restore parts of society once the coronavirus restrictions are behind us.

Some of the world’s largest infrastructure projects are currently underway. The China Belt and Road Initiative, estimated to exceed $4 trillion, aims to build trade between East Asia and Europe, while creating strong maritime links with India and East Africa. The High-Speed Rail projects in Japan and the US, costing around $96 billion, look to enhance their own domestic travel and trade networks.

The sector is growing, but it’s off the radar of some investors. Infrastructure can be difficult to understand or value and to an extent, hard to invest in. But there are ways to do so and it could offer some interesting opportunities.

It’s a specialist area though and comes with more risk. For investors considering this sector, we think it should only form a small part of a diversified portfolio.

This isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember all investments and any income they produce can fall as well as rise in value so you could get back less than you invest.

What are the opportunities?

Companies and governments often work together to build, maintain or fund infrastructure projects, like roads or hospitals. On one hand, government backing means increased regulatory pressure and, in extreme cases, the potential to nationalise projects and companies. This adds risk for investors.

On the other hand, governments tend to have the resources to support infrastructure projects. These projects are costly and can sometimes fail before they’re completed, so government support is often welcomed. They might also pump money into contracts over longer periods, which helps generate revenue and income for investors. This income is often linked to inflation, which means the value isn’t eroded by the rising cost of living.

Infrastructure assets are typically good at offering some shelter against inflation. Recent supply constraints have contributed to rising inflation. But infrastructure assets like freight rails and marine ports are playing a crucial role in helping to ease these issues, through the transport of goods.

We’re also unlikely to stop using essential assets like water and gas utilities anytime soon. These services are needed regardless of what’s happening in the economy. As a result, their prices can normally be increased – often in line with inflation – without affecting demand too much.

More recently, we’ve seen growing demand for infrastructure that supports a digitally connected society. The pandemic restrictions increased the need for high bandwidth and strong online connectivity to help facilitate remote working and communication. Things like cell towers and data centres are set to benefit and could be pushed further by the adoption of 5G.

Growing concern over climate change has opened another door of opportunity for investors. The transition into renewable energy resources is likely to mean increased funding for things like solar or wind farms. It’s expected the US bipartisan infrastructure bill will fund billions towards these types of power infrastructure assets.

Governments will also need to repair and replace old energy grids to make way for the transition. We hope to see more resilient power grids along with more efficient energy resources, but this isn’t an overnight fix. It will be costly and take some time, so a long-term view is needed.

How’s the sector performed?

The global infrastructure sector has done well over the past ten years. Although this is not an indication of how it’ll perform in the future.

Over the short term, performance has slowed though. In the early stages of the pandemic, the infrastructure sector held up better than the global stock market. But as restrictions are eased and the economy is beginning to open, global stock markets are seeing quicker recoveries.

10 year performance of the infrastructure sector vs the global stock market

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Lipper IM to 30/09/2021.

There are different sub-sectors within infrastructure, and performance has been mixed.

Energy infrastructure has done well this past year, buoyed by the push for renewable resources, demand for energy transition and enhanced government funding. Marine assets have done well too. It’s played a crucial part in transporting goods while travel restrictions have been in place.

Other transportation assets like toll roads, rails or airports have been hit hard. Travel restrictions sapped the usual volumes of passenger traffic so demand for these services dropped drastically. Certain utilities like gas, electric and water have been impacted too. The shift towards clean and renewable energy, alongside some regulatory pressures, hurt the sector.

Infrastructure investment ideas

Some infrastructure companies are listed on the stock market. 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 a mix of listed infrastructure companies.

Lots of 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. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to the net asset value (NAV).

Investing in infrastructure isn’t right for everyone. Investors should only invest when the investment’s objectives are aligned with their own, they understand the specific risks of an investment and there’s a specific need for the type of investment being made.

Let’s look at some examples.

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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