Infrastructure assets have gained a well-deserved reputation as stable, income-producing investments. The core end of the asset class possesses bond-like qualities, but offers the potential for higher capital gains, while the opportunistic end provides high returns, along with high risk, through development opportunities in emerging markets.
Many of the premier infrastructure firms are held in diversified mutual funds, so investors often already have these firms in their portfolio. But for those who want to target infrastructure specifically, investors can invest directly in a listed firm that develops, owns and/or operates infrastructure assets, as well as a variety of infrastructure-focused mutual and exchange-traded funds that allow retail investors access to this attractive asset class.
Only in recent years have companies that develop, own or operate infrastructure assets been listed on stock exchanges. These companies generate steady cash flows from tangible, long-lived, high-barrier-to-entry assets with semi-monopolistic pricing power. This is an attractive benefit, but investing directly in these firms often simply increases an investor’s equities position without accessing the benefits of the infrastructure asset class.
Despite the relatively high correlation to other equities, many investors have found mutual funds and exchange-traded funds (ETF) to be a good way to invest in infrastructure. Listed infrastructure funds tend to be high-yielding, generating stable income streams guaranteed by lengthy fixed-term contracts, often backed by a government. The funds offer diversification and professional management in choosing listed securities, as well as often having access to unlisted companies and partnerships.
Infrastructure funds are run by some of the biggest names in the industry — Morgan Stanley, Cohen & Steers, Russell, Lazard, RREEF, Brookfield, Macquarie — as well as smaller sector-specific managers. According to US News, there are 31 infrastructure-focused mutual funds on the market. One-year returns as of Dec. 31, 2014, ranged from 1.81 percent to 22.07 percent, with a 10.59 percent average. Expenses average 1.61 percent. These investment vehicles include funds that invest in securities, private equity and even master limited partnerships. Investing in MLPs is particularly popular in the energy sector.
Exchange-traded funds provide similar returns at lower costs. Though ETFs are typically less volatile than mutual funds, the 18 infrastructure-focused ETFs had an even wider range of returns than the class’s mutual funds. One-year returns ranged from 1.76 percent to 43.98 percent, with a 12.68 percent average. When you exclude the two emerging market funds, however, the top of the range return drops to 21.23 percent with an average return of 9.03 percent. Although ETF performance was similar to mutual fund performance during 2014, ETFs have a lower cost basis. Average expenses for ETFs come in at 0.67 percent.
For investors with a taste for risk, some of the highest returns are being found in India-focused funds. According to moneycontrol.com, which tracks funds available in India, there are currently 58 India infrastructure-focused mutual funds on the market. These are high-return, but just as high-risk, investments. One-year returns ranged from 17.1 percent to 82.1 percent, but these are very new funds without a track record. Twenty-nine of those 58 mutual funds have been around for less than three years. This lack of track record makes it hard to judge whether the fund’s returns are based on professional management, or simply being in the right place at the right time. The lack of a long-term track record also highlights the volatility. Although infrastructure is considered a stable, core-type asset class, any fund that focuses on development in emerging markets is going to find itself in a volatile situation. Add the vagaries of daily valuations and you’ll find a top-ranked India development fund realizing an 80.3 percent one-year return as of Dec. 31, 2014, but a 7.7 percent three-month and a –3.3 percent one-month return in 2015.
The infrastructure-focused funds found on U.S. exchanges have about $23.8 billion of total assets — so they are a minor part of the overall $15 trillion mutual fund market. And the past six months have shown a slowdown in returns as investors worry about rising interest rates and falling energy prices. But the asset class undoubtedly will grow. Seven mutual funds and two ETFs have been added to the investment universe in the past year alone. This is an investment for investors with a long-term perspective. The need for infrastructure isn’t going away, and neither are investors who are interested in accessing the opportunities provided by that need.