Infrastructure Investing: From Concrete to Computer Chips

Learn why Invesco Unit Trusts views information technology as a critical part of the infrastructure category

Nov. 9, 2016, was not only the day Donald Trump won the presidency; it was also the day that investors’ interest in infrastructure investments was reborn. Since President Trump was elected, expectations for a rebound in infrastructure spending have reached heights not seen in some time. Given President Trump’s purported $1 trillion infrastructure plan, there is reason to be excited. But we at Invesco Unit Trusts believe that having the proper context into what infrastructure represents today is key to successfully investing in the theme.

Expanding the definition of ‘infrastructure’

Infrastructure refers to assets that allow for the efficient operation of economies, and it is a driver of global gross domestic product (GDP). Traditionally, infrastructure has been divided into three categories: transportation, telecommunication and energy. However, our view is that a fourth category now exists: information technology (IT). Specifically, connectivity, cybersecurity, data centers and cloud-based applications have become critical to the ongoing operation of global economies.

In many ways, IT has always been a critical component of infrastructure. For example, which is more important to the cell tower — the steel frame or the communication chips inside of it? That’s a difficult question to answer. However, in recent years, we’ve seen IT take a more prominent role in infrastructure as capital expenditures for traditional infrastructure projects have slowed. IT has been used to extend the lifespan of existing investments, improve efficiency and boost return on investment.

We believe we are now at a point where IT has evolved from being supplemental to the infrastructure market to being integral. Information technology has become as important to the ongoing operation and growth of an economy as any road, cell tower or airport. In most cases, traditional forms of infrastructure are now reliant on different forms of technology — think of automatic tolling on highways, the computer systems within an airport’s flight tower, or how cell towers enable endless video streaming. By modernizing existing infrastructure investments with various forms of technology, value and efficiency have drastically improved on otherwise dated assets.

How Invesco Unit Trusts approaches infrastructure investing

That being said, we don’t see the traditional view of infrastructure and our modernized definition as mutually exclusive. Quite the opposite. We believe traditional forms of infrastructure stand to benefit from the potential government policy change we may see over the next four years. However, by including exposure to IT within our American Infrastructure Growth Portfolio, we not only diversify our holdings, but we position the portfolio to potentially benefit from where the funds have been flowing in recent years.

According to Morgan Stanley, global IT budgets have grown around 3% per year since 2010.1 Meanwhile, the US invested around 2.4% of its GDP in infrastructure (not including IT) from 2008 through 2013, which is not only 70 basis points below the level needed to support growth expectations, but equates to a 0% increase versus the 2000-through-2007 timeframe, according to McKinsey.2 Manufacturers’ new orders for capital goods (excluding defense and aircraft) is another metric used as an indicator for infrastructure investment. From January 2014 through October 2016, capital goods orders declined by an average of 2.0% year-over-year.3

Year-over-year change: Manufacturer capital goods new orders, excluding defense and aircraft

While the IT spending outlook is not as dependent on government funding, it could stand to benefit from any stimulus. President Trump specifically called out cybersecurity as a focal point during his “First 100 Days in Office” speech. Additionally, we expect any rebound in defense spending to directly benefit the IT sector as today’s version of defense is more focused on missile tracking systems, satellites and surveillance than it is on rifles and ammunition.

Given that President Trump will have a Republican-led Congress to work with, we believe that the United States will see some sort of rebound in infrastructure spending over the next few years. Until more details are known, however, we believe having broad-based exposure to the infrastructure theme — including investments in IT — is the most appropriate way to approach opportunities in this industry.

For more information, see American Infrastructure Growth Portfolio (INFA).

1 Source: Morgan Stanley, CIO Survey, Oct. 6, 2016
2 Source: McKinsey & Co., Bridging Global Infrastructure Gaps, June 2016
3 Source: St. Louis Fed, data as of Oct. 31, 2016

Nick Clare
Associate Portfolio Manager, UITs

Nick Clare is an Associate Portfolio Manager for Invesco Unit Trusts. Mr. Clare joined Invesco in 2013 from Robert W. Baird & Co., where he was a research analyst covering semiconductors. He joined Robert W. Baird & Co. in 2010. Mr. Clare earned his bachelor’s degree in finance from The University of Iowa.

Important information

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A basis point is one hundredth of a percentage point.

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.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

American Infrastructure Growth Portfolio risks

There is no assurance that a unit investment trust will achieve its investment objective. An investment in this unit trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what you paid for them. This trust is unmanaged and its portfolio is not intended to change during the trust’s life except in limited circumstances. Accordingly, you can lose money investing in this trust. The trust should be considered as part of a long-term investment strategy and you should consider your ability to pursue it by investing in successive trusts, if available. You will realize tax consequences associated with investing from one series to the next.

Security prices will fluctuate. The value of an investment may fall over time.

You could experience dilution of your investment if the size of the portfolio is increased as units are sold. There is no assurance that your investment will maintain its proportionate share in the portfolio’s profits and losses.

A security issuer may be unwilling or unable to declare dividends or make other distributions in the future, or may reduce the level of dividends declared. This may reduce the level of distributions certain of the Portfolio’s securities pay which would reduce your income and may cause the value of the Units to fall.

The portfolio invests in master limited partnerships (MLPs). Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments.

The trust is concentrated in the information technology sector. There are certain risks specific to the information technology sector such as rapid product obsolescence, volatile stock prices and speculative trading.

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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