Implications for Advisors

Evensky voices the central concern with global infrastructure: does it constitute a distinct asset class that worth adding to a portfolio?  Proponents of infrastructure investing argue that it should be.  But Evensky says a more reasonable approach is treating infrastructure investing as a distinct sector, alongside financials, energy, etc.  Infrastructure can also be viewed as discrete components with a multi-sector composition. 

A diversified portfolio will have significant exposure to infrastructure assets; the question is how meaningfully to tilt the portfolio toward these assets, and whether that can be accomplished by the funds above. Jay Rosenberg points out that his portfolio has significantly less overlap with global indices than the S&P Global Infrastructure Index.

Advisors will want to consider a target allocation in the 2.5-3.5% range, consistent with the role infrastructure plays in global GDP.

The above funds present measurably different exposures to infrastructure investing.  Most have significant non-US exposure and hence carry currency risk.  When reviewing the performance of these funds over the last 12 to 18 months, advisors should assess the gains from currency movements versus the underlying securities.  An international bias may be desirable, as infrastructure investing, particularly in emerging markets, is likely to offer substantial opportunities in the coming decade.  The OECD study cited above forecasts non-US infrastructure investing to outpace US spending by 58%, justifying a higher allocation to non-US assets.

Advisors should assess the following risks in these funds, and when considering infrastructure investing in general:

• Infrastructure investing is a relatively new discipline.  Do the fund managers have the necessary experience to evaluate securities in the global marketplace in this field?
• Infrastructure investing is gaining popularity.  Are the underlying securities fairly valued, or are new investors driving up prices?
• Privatization of public assets must gain public acceptance, at least in the US, and faces regulatory and political challenges that will vary by state.
• Regulatory factors can impose unpredictable and negative pressures on prices.  An economic slowdown can lead to surplus capacity.
• Privately funded infrastructure projects may face challenges from organized labor, resulting in concessions, delays, and unforeseen obstacles.
• Asset control typically resides with the public sector, and private companies may not be able to implement desired pricing and growth targets.
• Outside the US, infrastructure assets are subject to sovereign risk and the possibility of being nationalized.
• Despite the claim that infrastructure assets are insulated from commodity prices, some assets will be subject to fuel supplies, which may not be available at reasonable prices.

Evensky plans to further study this area. “It might make an interesting tactical investment,” he says.  With global inflation on the rise, advisors will want to carefully evaluate infrastructure investing.

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Susan Weiner, CFA, is a writer specializing in investment and wealth management. Contact her through http://InvestmentWriting.com.

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