Alternative assets: Examining opportunities in infrastructure
Invesco’s alternative framework, shown below, identifies five common investment objectives and aligns them with five types of alternatives that Invesco believes can potentially help investors achieve those objectives. In this blog, I’d like to focus on alternative assets, particularly the infrastructure subcategory.
Invesco’s alternatives framework: Aligning client objectives with different types of alternatives
It is not unusual for investors seeking inflation protection to invest in alternative assets. Furthermore, there are several types of alternative asset investments that have the potential to generate attractive levels of current income. The two best-known examples are real estate and commodities. Infrastructure and master limited partnerships (MLPs) are also examples of alternative assets that have the ability to generate income.
An introduction to infrastructure
As I mentioned in my previous blog post, of all the alternative assets, I find infrastructure to be the most attractive today. For this reason, I’d like to explore infrastructure in greater detail and explain why I believe this category may present an opportunity.
Merriam-Webster defines infrastructure as “the basic equipment and structures (such as roads and bridges) that are needed for a country, region or organization to function properly.” This definition is a good starting point, as it links infrastructure to the needs of society. Roads, bridges, tunnels, power lines, water supply, airports, shipping ports and railroads are all examples of infrastructure assets.
On a global basis, there is a strong need for infrastructure among both emerging and developed economies. For example, emerging economies need infrastructure to support their growth and increased urbanization. Meanwhile, developed countries need to make investments in order to upgrade and improve their existing infrastructure. For example, in New York, officials are in the process of building a new Tappan Zee Bridge that will replace the current dilapidated bridge. Additionally, the Port Authority, which oversees much of the regional transportation infrastructure in the New York/tri-state area, has announced plans to redevelop LaGuardia Airport.
As shown in the chart below, there is a tremendous need to make sizeable investments in infrastructure on a global basis. It is estimated that the current need for global infrastructure is $89 trillion.1 The challenge is how to pay for such investments when global GDP is approximately $78 trillion.2
The demand for infrastructure
A significant issue for many governments is funding. They have a strong need to make infrastructure investments but have limited ability to pay for them — partly due to the large deficits many governments face. This mismatch has created an opportunity for private investors to step in and fill the void.
For example, the LaGuardia Airport project will be built through a public-private partnership. While the use of private funds for infrastructure is viewed as novel within the US, it is actually quite common outside of the US, as most global airports are publicly listed and generate significant earnings from their retail business tenants, as well as airline passenger fees.
Investors looking to gain exposure to infrastructure can do so either through listed infrastructure securities, including equities of firms that own and operate infrastructure, or through unlisted infrastructure investments, which could include private ownership of assets or shares of unlisted funds. Typically only large investors, such as institutions, invest via unlisted investments, whereas individual investors typically invest through listed infrastructure securities or through funds that invest in them.
There are several reasons why infrastructure looks attractive:
- Attractive return potential — Global infrastructure has historically provided competitive returns relative to the broad market. For the 10 years ending May 31, 2016, the Dow Jones Brookfield Global Infrastructure Index returned 8.8% in average annual returns versus the MSCI World Index return of 4.6%.3
Growth of $10,000
The following example shows the performance of a $10,000 investment from Dec. 31, 2006, to May 31, 2016, into the various indexes, including the Dow Jones Brookfield Global Infrastructure Index.
- The potential for capital growth — A significant portion of infrastructure returns comes from recurring income. At the end of 2015, the dividend yield on the Dow Jones Brookfield Global Infrastructure Index was 3.4% versus 2.7% for the MSCI World Index.4 Moreover, global infrastructure has experienced 12% annual dividend growth in the years following the global financial crisis (from 2008 to 2015), compared with 2% and 3% annual dividend growth for global stocks and global real estate, respectively.5
- Potential for inflation protection — Historically, infrastructure has provided inflation-hedging characteristics. In a review of inflationary periods from 1995 until 2015 — defined as the US consumer price index above 2.5% — US infrastructure stocks (defined as a simple average of annual returns of the S&P 600 Water Utilities, S&P 500 Utilities and S&P 500 Road & Rail indexes) outperformed US stocks (as measured by S&P 500 Index) by 6.5% annualized.6
- Diversification — An investment in infrastructure can provide diversification to a portfolio as infrastructure has had a low correlation to fixed income and a moderate correlation to equities.7
Investment in infrastructure-related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors.
For all these reasons, I’d encourage you to talk to your advisor about infrastructure investments if you are contemplating an investment in alternative assets. Invesco Global Infrastructure Fund (GIZAX) is an example of a fund that invests in infrastructure.
1 Sources: McKinsey Center for Business and Environment and the World Bank. Investment need projection was as of January 2016 and does not include projections for sustainable costs. There is no guarantee that the projections shown will come to pass.
2 Source: The World Bank, as of April 2016
3 Sources: Invesco Real Estate, StyleADVISOR, as of May 31, 2016
4 Source: Bloomberg LP, as of Dec. 31, 2015
5 Sources: Invesco Real Estate, Bloomberg LP, as of Dec. 31, 2015. Global infrastructure is represented by the Dow Jones Brookfield Global Infrastructure Index, global stocks by the MSCI World Index and global real estate by the FTSE EPRA/NAREIT Developed Index. The annual dividend growth rate is the annualized percentage rate of growth that a particular stock’s dividend undergoes over a period of time, calculated as a simple average.
6 Sources: Invesco and StyleADVISOR, as of Dec. 31, 2015. US infrastructure average calculated using a simple average of annual returns of the S&P 600 Water Utilities, the S&P 500 Utilities Sector, and the S&P 500 Road and Rail indexes. US stocks represented by the S&P 500 Index.
7 Source: StyleADVISOR, from January 2003 to June 2015, based on the Dow Jones Brookfield Global Infrastructure Index, the MSCI World Index and the Barclays US Aggregate Bond Index. Equities are represented by the S&P 500 Index.
Correlation is the degree to which two investments have historically moved in relation to each other.
The FTSE EPRA/NAREIT Developed Index is an unmanaged index considered representative of global real estate companies and REITs.
The MSCI World Index is an unmanaged index considered representative of stocks of developed countries.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The US consumer price index measures the prices consumers pay for a basket of consumer-based goods and services.
The Dow Jones Brookfield Global Infrastructure Index measures the stock performance of companies that exhibit strong infrastructure characteristics.
The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment grade, fixed rate bond market.
The Barclays Global Aggregate Index is an unmanaged index considered representative of the global investment grade, fixed income markets.
The S&P 600® Water Utilities Index is a float-adjusted, market-capitalization-weighted index representing the US small-cap market water utilities industry.
The S&P 500® Utilities Sector Index is an unmanaged index considered representative of the utilities market.
The S&P 500® Road Index is an unmanaged index considered representative of US toll road stocks.
The S&P 500® Rail Index is an unmanaged index considered representative of US rail stocks.
Diversification does not guarantee a profit or eliminate the risk of loss.
Alternative products typically hold more nontraditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Invesco Global Infrastructure Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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Alternative assets: Examining opportunities in infrastructure by Invesco