A real road to profitability

Hey there, time traveller!
This article was published 20/11/2021 (1766 days ago), so information in it may no longer be current.

Why pay the toll when you can be paid the toll?

In a nutshell, this sums up one of the key reasons for holding infrastructure among your investments.

Of course, infrastructure investing is about more than investments in toll roads, though many funds in this sector do actually own them.

Yet infrastructure is so much more.

On the one hand infrastructure is its own asset class — like bonds, stocks and cash. On the other, infrastructure shares much in common with those aforementioned assets.

“We view infrastructure as sitting somewhere between equity and fixed income,” says Jeff Sayer, vice-president at Ninepoint Partners LP in Toronto.

Infrastructure can include stocks like Enbridge Inc., primarily a multinational pipeline company, engineering firms like SNC-Lavalin, and owners and operators of assets like Brookfield Infrastructure Partners LP.

Infrastructure investing can be more like real estate investing, involving ownership of bridges, toll roads, chemical storage facilities, utilities, and even cell towers.

Additionally, infrastructure investments often generate income, just like fixed income.

All told, investors have many ways to invest. And infrastructure is certainly worth considering as a buy and hold investment given trillions of dollars are expected to be spent by governments to upgrade rail, air, road, sea, energy, communications and utilities networks over the next two decades.

“Around the world a lot of infrastructure is aging and, in turn, there is a lot of money being spent” to replace or repair it, says Paul de Sousa, investment advisor and senior vice-president at Sightline Wealth Management in Toronto.

Of recent note is the Infrastructure Investment and Jobs Act in the U.S.

Worth US$1.2 trillion, it features US$550 billion in infrastructure spending over the next five years.

Canada too is making large investments with more than $180 billion currently invested or to be spent in coming years.

“Canada is really a leader in infrastructure when it comes to investment,” de Sousa adds.

For example, Brookfield Asset Management is the second largest asset manger of infrastructure in the world. As well, six of the world’s top institutional investors in infrastructure are Canadian, including the Canada Pension Plan (CPP) Investment Board.

Institutional investors have reason to be bullish.

The World Bank predicts by 2040 about $79 trillion will be spent globally on infrastructure. And that’s not even enough, with $97 trillion actually needed to address the overall infrastructure deficit, according to the bank, which provides financing for projects in low- and middle-income nations.

While most of us already hold infrastructure investments via pension plans like CPP, we also have plenty of other ways to get exposure in our RRSP and other accounts.

That includes the recently launched Mackenzie Northleaf Private Infrastructure Fund. Available since October, it is based on a long-running institutional fund, managed by Toronto-based Northleaf Capital, with a history of providing 10 per cent annualized returns.

“Retail investors have not typically had access to this type of product because it offers direct ownership of private infrastructure assets,” says Michael Schnitman, Mackenzie’s head of alternative investments.

In turn, investors can purchase an ownership stake in toll highways and freeways, chemical storage tank farms, fibre optic networks and wind farms.

Schnitman says the fund differs from most other infrastructure investments available to small-scale, individual investors. Most funds hold shares of publicly-traded companies involved in designing, building and servicing infrastructure. In turn, these funds are vulnerable to downturns in the stock market.

The Mackenzie fund, however, is a diversified portfolio of real assets that often perform well in inflationary environments while largely unaffected by rising interest rates and stock market downturns.

That said, Mackenzie’s fund does require a minimum investment of $25,000 and is only available to “accredited investors” who are typically high-net-worth individuals, Schnitman says.

Investors with less money may want to consider Ninepoint’s Global Infrastructure Fund, a mutual fund holding shares in companies that own and operate infrastructure assets, or participate in their development, construction and maintenance.

“We’ve really broadened the definition to include assets outside traditional infrastructure,” says Sayer, who manages the fund. Beyond the usual focus on utilities and pipelines, for example, the Ninepoint fund invests in data centres and cell towers, “which have benefited from the roll out of 5G and broadband.”

Sayer further notes the fund is also very accessible with an initial investment of $500 and a $25-minimum for subsequent contributions.

Other accessible options include exchanged-traded funds (ETFs), which have typically lower management fees than the aforementioned mutual funds but often do not include mutual funds’ expert management.

BMO’s Global Infrastructure ETF is one of the largest trading on the Toronto Stock Exchange. It tracks the performance of the Dow Jones Brookfield Global Infrastructure North American Listed Index, comprised of companies with more than 70 per cent of revenues from infrastructure. Top holdings include wireless tower operator American Tower Corp. and American Water Works Company.

While not a fast-growing sector like technology, infrastructure offers steady growth, de Sousa says.

“It’s definitely an underutilized component in portfolios,” he adds. “So if investors haven’t yet done so, they should give infrastructure a long look.”