As Rosenberg puts it, “This is likely to behave differently than anything else in your portfolio.”

Harold Evensky, president of wealth management firm Evensky & Katz, agrees the data is appealing, but he wonders if such performance is sustainable. “Is this just a hot market?” he asks.

Rosenberg believes global infrastructure is up to the challenge. He suggests it could perform relatively better in the current weakening environment because global infrastructure investments shine in periods of slowing growth and rising inflation. Rosenberg says, “I expect infrastructure—because of its stable cash flows across economic cycles—will exhibit even lower volatility relative to other asset classes over time.”

These stable cash flows are one of the key attributes of global infrastructure companies.  A 2007 study by the Pension Consulting Alliance found a number of other factors that favor infrastructure investing:

• Long Life Assets – Infrastructure employs capital intensive assets with 25 to 99 year concession agreements.
• Inflation Protection – Revenues are typically linked to the CPI
• Monopoly or Quasi-Monopoly – High barriers to entry, due to scale and capital cost, create effective entry barriers and diminish competitive threats
• Low Correlation – Returns which are uncorrelated to major indices provides portfolio diversification and low beta
• Inelastic Demand – Predictable demand with little volatility makes these investments less susceptible to economic downturns
• Limited Commodity Risk – Limited exposure to commodity pricing reduces volatility
• Insensitive to Changes in Technology – Low risk of redundancy or technology obsolescence decreases overall investment risk

These characteristics will contribute to good performance in a challenging economy.

Infrastructure expenditures are forecast to be 2.5% of global GDP over the next two decades, according to an OECD study (“Infrastructure to 2030: Mapping Policy for Electricity, Water, and Transport”). That number increases to 3.5% with the inclusion of electricity generation and other energy-related infrastructure. The percentage will rise further as the world population grows and becomes more urban, requiring more utilities, transportation, communication, and social services—the major categories of infrastructure—in emerging markets. Developed nations also offer opportunities because they are turning to private companies to renew their aging infrastructure.

Infrastructure Investing Options for Advisors

Infrastructure investing was pioneered in the early 1990s, when the Australian bank Macquarie partnered with the government to invest in transportation infrastructure.  In what became known as the Macquarie model, the bank raised funds from institutional investors on a world-wide basis and deployed them through public-private partnerships (PPPs) to fund infrastructure projects.  Such funding was especially popular for towns and local governments that were facing budgetary constraints.  The Macquarie model embodied substantial leverage, and many of their funds are now facing performance pressure due to the credit crisis. Institutional investors worldwide remain very active in infrastructure investing, with an estimated $50 billion in new funds brought to the global market in 2006 and 2007.

Today, advisors can employ a limited number of ETFs and actively managed mutual funds that target infrastructure investing.  These offer the advantages of access by ordinary investors and greater diversification, and they put your money to work on day one.

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