In need of an upgrade: The U.S. infrastructure opportunity

While prospects for passage of an infrastructure bill still exist, Chris discusses other factors supporting the asset class, and ways to access it.

Politicians of both parties agree on little these days, but there has been widespread acknowledgement in recent years that the U.S. needs significant investment in infrastructure, which earned a D plus grade from the American Society of Civil Engineers last year. However, there is currently little consensus about how to pay for it. As a consequence, infrastructure policy in the U.S. continues to remain on hold.

Since President Trump was elected promising major investments in infrastructure, investors have eagerly awaited that to come to fruition, recognizing it could have a major impact if enacted thoughtfully. We still believe that the prospects of some sort of infrastructure package look positive. However, it is also important to consider the broader case for investing in infrastructure companies, and to understand the nuances of investing in the asset class.

Why is now the time to focus on infrastructure?

Investor interest is strong

A 2017 survey of institutional investors responsible for $7 trillion of assets found that 90.3% of asset owners intended to increase their investment in infrastructure over the next 3-5 years, an increase from 65% the previous year. Most respondents identified the U.S. as the “next big infrastructure market”.[1] Across all regions, infrastructure focused exchange traded funds (ETFs) saw inflows of $448 million in the first three months of 2018, representing asset growth of 4.5% and the second highest category of thematic ETF inflows after socially responsible ETFs.[2]

Other sources of financing exist

The limitations of government finances mean that private capital will also likely be essential to filling the infrastructure gap, in our view. The public-private partnership (PPP) model is increasingly being used across U.S. states. For example, LaGuardia airport’s 2016 $4.5 billion development project was financed with $3.9 billion of private sector debt and equity, and could be a model replicated nationally.[3]

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New investment vehicles make it easier to access infrastructure.

Infrastructure assets have traditionally been characterized as long-lived, with high development costs (barriers to entry) and the potential for steady income streams, often linked to inflation. Investors have historically accessed infrastructure through private debt and equity markets (see graphic below). ETFs have made it easier for investors to invest in infrastructure with relatively minimal capital outlay, greater transparency and liquidity, while giving up the “complexity premium” offered by private structures.

infrastructure_opportunity

In the equity market, while investors used proxies such as utilities, transportation and energy sector exposure to express views, there are now ETFs that focus exclusively on this opportunity, specifically those that capture the infrastructure value chain. This value chain can include companies that directly operate or manage existing infrastructure assets, or companies that supply goods or services to existing or new infrastructure operations. We believe that a significant fiscal injection into the sector—should an infrastructure bill pass and be implemented—would give it a pro-cyclical appeal in the medium term for infrastructure operators as well as various other companies across the value chain. Over the long run, the regular cash flows traditionally associated with established infrastructure projects give the sector a secular appeal.

Bottom line

A deteriorating public infrastructure system threatens the ongoing competitiveness and future economic growth of the U.S. However, the recognition across both sides of the aisle of the need for bold action provides grounds for optimism. Listed infrastructure equities provide a liquid way to seek both medium term capital appreciation as well as income streams in the long term. Institutional investors have long included infrastructure in their strategic asset allocations. Retail investors may want to consider doing the same.

Featured funds

iShares U.S. Infrastructure ETF (IFRA)

iShares Global Infrastructure ETF (IGF)

Chris Dhanraj is the Head of the ETF Investment Strategy team in iShares and a regular contributor to The Blog.

 

[1] Source: EDHEC Infrastructure Institute-Singapore, Investor Perceptions of Infrastructure, 2017, November 2017.

[2] Source: BlackRock Global Business Intelligence, March 29 2018. Flow data sourced from Markit and calculated by BlackRock. ETP groupings and categories are determined by BlackRock.

[3] Source: BlackRock, Global Real Assets Outlook, 2018.

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