Two of the biggest problems facing investors' portfolios these days are inflation and volatility. The cold hand of inflation can slowly eat away purchasing power, while volatility can magnify losses and hurt overall total returns. Finding solutions to grapple with these two powerful forces is a necessity for investors who are looking toward the long term.
Luckily, there's a boring asset class that's up to the task.
While toll-roads, pipelines and sewer treatment operations may not seem like high-growth investments, the truth is that infrastructure remains one of the best ways to build inflation- and volatility-proof wealth. There are plenty of positives as well as growth opportunities for investors who take on the sector.
Trillions in Spending Needed
Infrastructure remains a compelling long-term asset class for portfolios. Sustainable economic growth necessitates continued investment in new infrastructure facilities. As emerging nations continue to grow at breakneck speeds, their newly found higher incomes will lead to increased demand for a better quality of life. Better environmental services, high-speed communication and new transportation beyond the city centers will need to be built.
In the developed world, the opposite is true. Even in many developed nations, many major infrastructure projects were constructed just after World War II. In England, some sections of London's sewer system are around 100 years old. The general dilapidated state of these vital economic assets requires a major overhaul in order for developed nations to remain competitive on a global scale.
Overall, building and repairing our planet's vital infrastructures is going to cost some serious dough. CIBC World Markets estimates that total infrastructure spending over the next 20 years will need to reach nearly $35 trillion. The Organization for Economic Co-Operation and Development (OECD) pegs that number closer to $50 trillion, in order to keep pace with the world's growing population.
However, as various governments grapple with budget and austerity woes, much of this important and needed spending has taken a backseat to matters that are more "imperative." This is where both retail and institutional investors come in. As cash-strapped governments are forced to find new ways to slash ballooning budgets, selling public assets could mean the difference between insolvency and business as usual.
Why Buy a Toll-Road?
Adding infrastructure to a portfolio can be just what the doctor prescribed in order to overcome both inflation and volatility as well as provide some growth aspects. First, firms associated with design and construction can offer a capital gain component. After all, those big dollar amounts will first hit the companies that are doing the heavy lifting.
However, the stability of the sector is where infrastructure really shines. Payments for the use of certain assets, such as a cellular tower or highway, produce stable cash flows and revenues for owner/operators. These steady cash flows ensure that the sector has a low correlation with other asset classes and provide diversification benefits, while boosting returns and curbing risk. More importantly, these cash flows are commonly linked to measures of economic growth, such as gross domestic product and inflation. That feature is a key reason why the asset class is a great inflation fighter.
Accessing the Opportunity
Adding infrastructure investment to a portfolio can be a daunting task, as the breadth of the sector is so large. However, given the sector's newfound popularity with investors, Wall Street has attempted to quantify the theme into several vehicles.
For those investors with large enough portfolios, private equity remains one of the best ways to tap infrastructure assets. Private equity funds from such asset managers as KKR (NYSE: KKR ) and Carlyle (NYSE: CG ) have launched in recent months, in order to take advantage of opportunities in the sector. These funds allow investors to access private infrastructure assets and engage in transactions not featuring publicly traded firms. Costs can be high for PE funds and there could be long capital lock-up periods, so investors going this route need to really do their homework. For the rest of us, this growing theme has spawned a variety of ETFs, closed-ended funds and traditional mutual funds.
Actively managed mutual funds such Kensington Global Infrastructure fund (KGICX) or index ETFs such as the iShares S&P Global Infrastructure ETF (ARCA: IGF ), make adding the sector to a portfolio quite easy. Furthermore, investors can reap the benefits almost immediately.
Overall, ETFdb.com lists more than six infrastructure-specific exchange traded funds and Morningstar lists 76 different utility-focused funds.
The Bottom Line
Investors who want to build long-term, stable and inflation-resistant wealth should consider infrastructure assets. While not the most exciting of investments, these assets provide exactly what a portfolio needs to navigate the current and future markets.
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