Investing in Infrastructure: The Ultimate Diversification

May 2, 2013

Businessman walks down the staircase of an office building in TokyoAs a product manager, receiving an email that links to a piece about “investment in infrastructure” screams “Opportunity!” to me.  How firms are spending on technology is a key indicator of how likely they might be to purchase new or upgrade existing products.  But this link took me to a place about investing in a different kind of infrastructure, public infrastructure versus technical infrastructure.  Big difference, but no less interesting.

The McKinsey piece was an interview with Mark Wiseman, president and CEO of the Canada Pension Plan Investment Board.  He spoke about why investing in infrastructure is a particularly good fit for pension funds, namely that it provides stable long-term cash flows.  The key consideration they make when investing in infrastructure involves the strength of a regulatory framework, and when it provides consistency and predictability, investors feel confident that the framework will withstand government change.  For pension fund managers, the most opportunity lies in those jurisdictions that have proven over time that capital is available.  In emerging markets infrastructure investment is more risky.  But that’s a risk inherent in emerging markets in general—uncertainty.

Shortly thereafter, I found myself thinking about investments in infrastructure in general.  Over the last several months I have written posts here about both austerity measures and alternative investments—and it hit me that they kind of all come together here, in infrastructure investing.  All the discussion about austerity measures highlights the fact that the gap between available capital and that needed for infrastructure projects is growing.  Infrastructure investments are a type of alternative investment.  I started to look at infrastructure investing holistically, as a great strategy supporting portfolio diversification.  And the emergence of infrastructure indexes addresses investor education and confidence issues while providing transparency.

The “Global Infrastructure Investment Index: Move From Risk to Reward” published in December 2012 by the London-based consultancy EC Harris provides an extremely comprehensive and insightful look into this area of investing.  This study also cites the benefit of the long-term, steady income streams that infrastructure investments offer, attractive qualities given the continued global market upheaval.  Governments need infrastructure investments in order to grow and countries are planning to invest hundreds of billions of dollars over the next several years, including Brazil ($596B USD through 2014) and the UK ($320B USD by 2020).  The study also emphasizes the importance of the location of the infrastructure, and specific factors such as long-term economic growth projections, the security of the investment, and the ease of doing business in a particular location when it comes to developing an investment strategy.

I was particularly interested in how the index categorizes countries.  They look at assets (rich or poor) on one axis and cash (rich or poor) on the other.  Countries that fall into the Cash-Rich/Asset-Rich quadrant (e.g., Singapore, Canada, and China) are the least risky and Cash-Poor/Asset-Poor countries (e.g., India, Pakistan) are the riskiest.  That said, least risky does not equal most attractive.  EC Harris then overlays what they call the “infrastructure investment lifecycle” and look at where countries are in terms of infrastructure development.  As index is created as a result of the analysis, and the most recent one ranks the top 10 countries for infrastructure investing as follows (from 1 to 10):  Singapore, Qatar, Canada, UAE, Sweden, Norway, Malaysia, Netherlands, Australia, and Chile.

This punch line of a top 10 list, with Canada seated in the bronze-medal position, makes it perfectly clear that Mark Wiseman is on the right track in thinking that informed investment in infrastructure is a key strategy with a portfolio designed to fund “multigenerational liabilities.”  Beyond that, for other investors, there is tremendous potential benefit provided that each investment prospect is analyzed comprehensively—no different than any other investment. 

What role is infrastructure investment playing in your overall strategy?  Has how you think about it changed over time?  How so?  Do you expect your views to evolve over time?

 – Nicole Comeau, Product Manager

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: