Infrastructure funds invest in long-lived assets like roads, bridges, airports, utilities, and communications networks. They can provide stable cash flows and diversification from stocks and bonds, but also carry risks like political and regulatory uncertainty. This article examines the return potential, risks, major sectors, and suitability of infrastructure funds for different investors to evaluate whether they make a good investment overall.
Infrastructure funds have generated steady returns historically
Infrastructure funds invest in assets that provide essential services to society and have monopolistic characteristics. This grants them stable, predictable demand and cash flows. Studies show infrastructure funds generated annual returns of 9-11% over the past 10-15 years. Returns are driven by contracted inflation-linked payments rather than economic cycles. Infrastructure returns also have low correlation to other assets, enhancing portfolio diversification.
Infrastructure investments are exposed to regulatory and political risks
A major risk is unforeseen regulatory changes that negatively impact cash flows, like rate cuts for utilities. Assets often require government permits and contracts to operate, exposing them to political interference. Laws could force sales of infrastructure assets to government entities below fair value (expropriation risk). Investments in emerging markets have heightened political risks.
Core infrastructure sectors include transportation, energy, and communications
Major infrastructure sectors include transportation (roads, rail, ports, airports), power generation and distribution, water utilities, waste management, gas and oil pipelines, and communications towers and networks. Different sectors have distinct risk-return profiles. Transportation assets like toll roads offer stable contracted cash flows but limited appreciation. Communications towers have higher growth potential but more variable revenues.
Infrastructure funds suit retirement and pension investors
The stable yields, inflation hedging ability, and low volatility of infrastructure funds suit them well for conservative investors like pension funds and retirees. Endowments and sovereign wealth funds also allocate to infrastructure for diversification and liability matching. The illiquidity and long time horizons of infrastructure assets make them less fitting for retail investors with short horizons or unpredictable cash needs.
Infrastructure investments play a role in ESG-focused portfolios
Infrastructure assets like renewable power facilities, electric vehicle charging networks, and public transit projects align with ESG principles and aid the transition to a low-carbon economy. Governments plan to invest trillions in sustainable infrastructure which presents a long-term opportunity. However, some conventional assets like oil pipelines conflict with sustainability.
Infrastructure funds can play a portfolio-enhancing role for institutional and high net worth investors thanks to their moderate yields, diversification, and inflation-hedging ability. However, the asset class carries material regulatory, political, and liquidity risks that must be incorporated into allocation decisions. Their sustainability profile also varies across sub-sectors.