Making the case: Investing in infrastructure
An allocation to infrastructure can help build exposure to a rewarding asset class, says Mellon fund manager Jim Lydotes.
Global infrastructure forms one of the basic foundations of modern society. It is the roads we drive on, the schools and hospitals we attend and the access we get to water and waste management. Solid, well-built and well-maintained infrastructure is critical in supporting our everyday lives and economies.
With an estimated 68% of the world’s population expected to live in urban areas by 2050 – up from 55% today – and 80% expected to be city dwellers by 2100, the race is on to build 21st century infrastructure of a quality, robustness and scale fit for future generations.¹ Accordingly, infrastructure investment required for sectors such as agriculture, transport, power and water stands at about US$5 trillion per year to 2020.²
But how can we invest in these backbone services and structures? One of the ways is through a fund that is exposed to companies involved in or benefiting from infrastructure projects or assets.
Although many infrastructure strategies have historically been limited to a narrowly defined range of physical assets such as transport, energy and utilities, infrastructure investing increasingly encompasses ‘non-traditional’ areas such as television transmitters, hospitals, schools and universities. These are often steady, cash-generative, income-producing businesses as their contracts can involve long-term projects backed by government funding. Companies, such as utilities, also tend to have their prices linked to inflation, providing their earnings a level of predictability other industries don’t possess.
Jim Lydotes, manager of BNY Mellon’s global infrastructure income strategy, says these days even highly developed economies are feeling the squeeze as ageing and increasingly inadequate infrastructure strains to cope with the demands imposed by demographic change, rising urban populations and increased service needs, he says.
Although many think these strains relate only to traditional power, pipelines and transportation needs, Lydotes believes social and communications infrastructure are two important strands to watch out for both in the near and long-term future.
In terms of attractive investment areas, he points to aged care facilities, which he believes are revolutionising the way people think about ‘elderly housing’. As globally many countries, particularly in the developed markets, contend with ageing populations, society is working towards destigmatising the idea of moving into care facilities, improving living environments and their attractiveness.
“If successful, the companies who run these facilities can lower the age of admissions and capture the ‘customer’ for a longer period of time. They are finding the way to do this is by developing nicer, better equipped housing,” says Lydotes.
On the communications front, after years of anticipation, Lydotes also has high hopes for 5G connectivity, believing its application could revolutionise working practises in some areas such as retail. Lydotes believes telecom companies will also see major improvement in some of their 5G coverage and believes a 5G revolution could be imminent as its infrastructure is built out.
An asset class is a broad group of securities or investments that have similar financial characteristics.
The rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier.
¹United Nations. 68% of the world population projected to live in urban areas by 2050, says UN. 16 May 2018 and Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia by Anthony M. Townsend. 2013.
²The Green Investment Report, 2013. http://reports.weforum.org/green-investing-2013/required-infrastructure-need.