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Infrastructure is one of 2021's most prominent investment themes and as is par for the course when the government is involved, the infrastructure package that's been discussed for nearly all of this year hasn't been signed into law.
While Capitol Hill is failing infrastructure investors (again), the asset class is still worth discussing with inflation-wary clients. It has an established history of beating inflation and many of the funds in this category sport higher yields than broad market equity and aggregate bond funds.
Additionally, infrastructure resonates with clients on a practical level. Nearly everyone, regardless of political persuasion, see value in enhancing American roads, bridges, airports and water infrastructure. For too long, infrastructure, or lack thereof, has been a blight on the world's largest economy. U.S. infrastructure earns near failing grades when it's evaluated and there's simply no reason to delay projects that increase efficiencies, improve quality of life and create jobs.
From investment perspective, even when accounting for political disappointment, infrastructure remains compelling and that allure goes beyond inflation-fighting capabilities. One of the reasons is that infrastructure and related investing are in need of refreshing to meet the demands of a modern, more digital society.
Refreshing Infrastructure Investing
Broadly speaking, when advisors address infrastructure with clients, clients are likely to perceive it as a stodgy, slow-growth, income-generating asset class that lacks cache, but one that's credible in helping them manage economic downturns. However, there's more to the story.
“While both of these justifications remain true today, the future of infrastructure may be much more dynamic. The combination of demographic pressures, new technologies and changing consumer behavior could trigger meaningful long-term changes in infrastructure from which investors could benefit,” according to ProShares research.
As noted above, what constitutes infrastructure is changing and that's a good thing for both advisors and clients. With infrastructure going more digital and further leaning into technology, it gains investment sex appeal and is attractive to a broader swath of clients.
“New technologies are playing a critical role in changing the infrastructure segment. Traditional infrastructure assets like roads, bridges and ports still play a critical role,” adds ProShares. “However, the recent infrastructure spending bill designed by the White House also included areas such as communication infrastructure, water security, and electric vehicles, as well as resilience in areas like the power grid. The infrastructure we need globally, and that will power the next century, will almost certainly be much more dynamic than in the past.”
The new infrastructure order touches concepts some clients are already familiar with including electric vehicles, communication infrastructure and e-commerce. Yes, e-commerce. Rising levels of online shopping require better bridges, highways and roads to get packages to their destinations.
Infrastructure Future Bright With or Without Government Assistance
As advisors know, waiting on the government to lift portfolios – regardless of which party is in charge – is a fool's errand. This year's infrastructure debate, which actually became a rare act of bipartisanship, proves as much.
Fortunately, many of next-generation infrastructure concepts can be fueled by private industry. Building more EV charging infrastructure and mobile communications towers are prime examples. Indeed, big data requires big infrastructure investments, most of which will not be driven by Uncle Sam.
“To support this rapidly growing stream of data, existing networks will need more capacity (wider bandwidth). In total, capital expenditures at leading wireless providers American Tower, Crown Castle and SBA Communications grew by 8.5% on an annualized basis from 2017 to 2020, compared to just 1.6% for the S&P 500,” notes ProShares.
Communications and data infrastructure is just one example, but it underscores the point that the future of infrastructure is here and some clients are apt to be interested.