What is infrastructure investing?

Infrastructure assets are essential to the growth and functioning of our society and economy. Since infrastructure plays a unique economic role, investing in infrastructure comes with distinct benefits and risks. As a self-directed investor, you can gain exposure to this asset class through publicly listed infrastructure securities by purchasing individual stocks or investing in mutual funds or exchange trade funds (ETFs) via your NBDB brokerage account.

What is infrastructure investment?

From highways to cell phone towers, pipelines to wind farms, infrastructure investment focuses on physical assets and the companies created to build, manage, and operate those assets.

Infrastructure assets include:

• Transportation systems: toll roads, bridges, railways, and airports
• Public utilities: water, electricity and sewage systems
• Energy infrastructure: oil and gas pipelines
• Renewable energy: hydro, solar, or wind power projects
• Communication networks: cell towers and broadband infrastructure

Infrastructure investing is usually associated with major, long-term projects that are either funded privately, and only accessible to institutional investors, or are publicly listed and accessible to self-directed and other kinds of retail investors.

What is a real asset?

A real asset is another term used to identify an infrastructure investment. Traders often use ‘infrastructure asset’ and ‘real asset’ interchangeably because infrastructure investing involves building or managing physical projects or structures - ‘real’ things in the economy. Even though real estate and commodities like agricultural products are also ‘real’ in this sense, they operate within their own separate asset categories.

Characteristics of infrastructure investments

Infrastructure investments are considered to be long-term and low-risk investments. They enable economic growth and vitality and typically involve large and complex projects. Infrastructure projects are often subject to strict government regulation, involve detailed consultancy and oversight processes, and operate across a long-time horizon.

Given the complexities of building a highway, bridge, or railway, an infrastructure project cannot be easily duplicated, and unlike real estate, a competitor is unlikely to build another one a block away. As a result, infrastructure investments are designed to generate returns over a much longer time frame than other kinds of securities. They are also not subject to the kind of direct competition that assets in other investment classes typically encounter.

Revenue generation and types of infrastructure investing

Infrastructure investing involves buying shares in a private company set up to build or manage an infrastructure project. Infrastructure investments usually take the form of dividend or distribution-paying securities.  Shares in infrastructure ETFs or mutual funds will pool several different projects into a single, tradeable security.

Individual infrastructure projects can be categorized into two main types – a regulated infrastructure asset and a user-pay asset model. Each one offers different ways of generating revenue.

• Regulated infrastructure asset: A government agency determines the revenue the operator can generate on the asset. A good example would be a utility that provides water or electricity to the population.
• A user-pay asset model: In this kind of project, the revenue generated depends on the number of people using the asset. Examples include a bridge toll, where the estimated revenue is based on the number of annual car crossings, or an airport, where revenue is determined by the fees charged to airlines and passengers.

In both categories, an annual increase is usually factored into the price or fee that the infrastructure provider collects. This acts as a form of inflation protection for investors. Additionally, the asset might generate higher returns if more people use it than expected. For example, a toll bridge that experiences higher than predicted traffic will generate more revenue. 

At the same time, not all infrastructure projects are public-facing. Many examples of infrastructure investment opportunities involve projects linked to creating business-to-business infrastructure such as railroads, pipelines, ports, telecom networks or data centres.

Benefits of infrastructure investing

Infrastructure investments typically involve longer time horizons and lower risk than other types of securities. Some of the benefits of infrastructure investing include:

• Diversification: Infrastructure provides a measure of diversification compared to regular securities. They tend to have a different risk and return profile than other equities. Another advantage is geographical diversification since many assets are not only found in Canada and the U.S. but also across the globe.
• Lower volatility: Infrastructure is difficult and expensive to build and involves a high level of government regulation and intervention. A project like a toll highway tends to be a necessary service where demand remains consistent over time. This makes infrastructure investments less volatile since price increases or changing economic conditions will not significantly impact usage.
• Stable and recurring cash-flows: Since demand is less volatile, earnings are easier to predict over the long term. As a result, infrastructure investments typically offer regular and consistent returns in the form of dividends or distributions.
• Inflation Hedge: Infrastructure assets benefit from inflation in two ways. First, the cost of building or replacing an infrastructure asset increases over time, positively impacting the asset’s value. Secondly, infrastructure user fees tend to be adjusted for inflation and go up incrementally every year, protecting the investment from increasing inflation.

Risks of infrastructure investing

Investing always carries a level of risk. Some of the risks that are specific to infrastructure investing include:

• Interest rates: Sudden rate increases can impact the cost of building or renovating projects and lower the return on investment. They can also have a negative effect on a company’s borrowing costs. In many instances, large amounts of debt are used to fund projects. Debt obligations that need to be renewed at higher rates can negatively impact the profitability of a project.
• Political risks: Local or national governments can change the rules governing an infrastructure project, causing revenues to decrease, or, in the case of some developing countries, they can expropriate the asset without compensation.
• Publicly listed infrastructure: Publicly listed securities can behave like other equity securities over the short term or during sharp market corrections. Infrastructure investors must be patient when markets get volatile and avoid panic selling.

How to invest in infrastructure

Self-directed investors should do some research before purchasing infrastructure securities. Firms in the utilities, pipelines, transportation, and telecommunication industries are often involved in infrastructure building, management, or operations.

You can also look at publicly listed asset management firms that among other alternative investments manage infrastructure assets or invest in an infrastructure funds. If you are unsure about individual securities, you can select between several ETF providers offering infrastructure or real asset exchange-traded funds.

If an investor wants to purchase a mutual fund or ETF with the words ‘real asset’ or 'infrastructure' in the name, they should do additional research to ensure that the fund includes infrastructure investments in its pool of assets.

In general, ETF and mutual fund infrastructure investments will invest globally, be managed passively or actively, and pay a distribution to investors. Since many infrastructure securities are available outside North American markets, ETFs and mutual funds are an easy way to gain access to international investment opportunities.

Infrastructure and a diversified investment portfolio

Infrastructure assets have a reputation for being 'slow burn investments.' They carry a low level of risk and generate slow but steady returns. Their low volatility means they might be a good addition to a portfolio, balancing out more dynamic and volatile holdings.

As countries look to grow their infrastructure, infrastructure assets will play a larger role across a range of sectors in North American markets and around the world. Before diving in, self-directed investors must do their research.

In addition to brokerage platforms like NBDB, third-party financial news sources and research reports can further enhance your ability to analyze the market, assess market conditions, and decide if an infrastructure stock or ETF is a good addition to your portfolio. 

Don't forget that NBDB clients get free access to our Trading Central tools, including Fundamental Insight, Technical Insight, and Strategy Builder!

Further reading

Here are some articles and tools available on the NBDB website that you can consult to learn more and guide you on your self-directed investing journey:

• How to start investing: A guide for beginners
• What are the different Canadian stock markets and exchanges?
• What is quality investing?
• Trading Central

Ready to take the next step?