Savvy investors looking for safe, reliable long-term growth should take a serious look at including infrastructure funds in their portfolio.
According to a report from global business analysts McKinsey, almost $50trn of infrastructure investment is needed globally just to keep pace with expected economic growth.
Yet despite the rapidly growing need for new roads, railways, hospitals, sewers and electricity grids, there’s a projected global shortfall of $350bn a year if current trends continue.
Global emerging markets need an expected $30trn of infrastructure investment to meet the demands of their burgeoning economies.
Developed economies are facing a big shortfall, too. China invests more every year in the infrastructure industry than North America and Western Europe combined.
The McKinsey report Bridging Global Infrastructure Gaps highlights that:
- From 2017 through 2030, the world needs to invest about 3.8% of GDP – almost $50trn, or an average of $3.3trn a year – in economic infrastructure just to support expected rates of growth.
- Western Europe needs $12trn of investment through to 2030, the US and Canada $22trn, global emerging markets $30trn and China $29trn.
- If the current trajectory of underinvestment continues, the world will fall short by roughly 11%, or $350bn a year.
- Investment in infrastructure has declined as a share of GDP in 11 of the G20 economies since the global financial crisis
- Institutional investors and banks have $120trn in assets that could partially support infrastructure projects. Some 87% of these funds originate from advanced economies, while the largest needs are in middle-income economies.
Underinvestment of the infrastructure industry
“We found that while trillions of dollars in annual investment will be required well into the future just to keep up with expected rates of growth,” say the report’s authors, Jacques Bughin, James Manyika and Jonathan Woetzel.
“A pattern of underinvestment has produced a growing shortfall and allowed many foundational systems to deteriorate.
“Too many countries – emerging and advanced economies alike – have paid insufficient attention to maintaining and expanding their infrastructure assets, creating economic inefficiencies and allowing critical systems to erode.”
So how can the individual investor cash in on the inevitable boom as governments around the world gear up their infrastructure to cope with booming economic growth?
First let’s look at the pros and cons of investing in infrastructure. What it won’t do is make you rich quickly. Returns are sure and steady.
What it does do is provide steady, reliable growth within a portfolio geared towards the long-term. And in the long run, it may well turn out to provide better returns than a haphazard ‘win a few, lose a few’ short-term approach to investing.
So if you decide infrastructure investing is what you are looking for – perhaps as part of your pension portfolio – what’s the best way to go about it?
The first option is to buy shares in an infrastructure company, such as UK-based Balfour Beatty or Costain. However, investing in any one single company always carries an element of risk – even the biggest have stumbled.
It may not happen very often, but it only takes losing a major government contract for shares to tank.
A much safe option – as with any form of investment – is to buy into a fund that holds a basket of shares, so you spread the risk more widely.
With infrastructure funds, the vehicle may not just be investing in companies listed on the stock exchange, but also in unlisted companies, such as private equity firms that invest heavily in infrastructure.
This gives the fund much more flexibility and the potential for much greater returns, as unlisted companies are generally more dynamic and active in their management of projects than huge PLCs.
There are two main types of fund available to private investors – what are known as open-ended funds (OEFs) and closed-ended funds (CEFs). An open-ended fund is a mutual fund in which you buy units that you can legally redeem with the issuer, usually at the close of the business day.
A closed-ended fund issues a finite number of shares, which are then traded on the stock exchange and can be bought and sold at any time.
One of the biggest infrastructure funds traded on the London Stock Exchange is the FTSE250 International Public Partnerships (INPP), with a market capitalisation of £2.15bn.
Roughly half its shareholders are big institutional investors, but it also has a large number of ‘retail’ private investors.