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A case for boarding the infrastructure train

Passengers enter a train in Warsaw, Poland. Brussels promised billions of euros to revamp eastern Europe’s railways.


Investors are often enticed by dramatic, "sexy" options. Think hip technology companies in Silicon Valley, and gold miners making discoveries in a remote jungle. Or if their personalities are more conservative, they choose to invest in traditional, easy-to-understand companies such as banks or retailers.

But one asset class that features conservative fundamentals while still tapping into global growth trends is infrastructure. Infrastructure refers to the permanent assets that a society needs for the orderly operation of its economy. Examples include transit systems, water treatment facilities, pipelines and refineries, electrical grids, and cellphone towers.

It's not hard to see the potential in this sector. Billions of dollars are being spent to upgrade highways, subway systems and sewers in North America and Europe – and billions more will be needed in the years to come.

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But perhaps more significantly, infrastructure investing is a way to tap into the economic emergence of the developing world.

"If everyone in Asia took a shower three times a week, the region would be out of water in one year," says Michael Underhill, founder and chief investment officer at Capital Innovations LLC, an investment manager to institutional clients and mutual funds, including the Exemplar Funds based in Toronto.

Mr. Underhill notes global demographic trends are driving the need for infrastructure construction in the world's developing economies. China and India have shifted from agrarian to industrial, urban societies. These countries require new, modern infrastructure in order to facilitate the expansion of industry, the urbanization of their economies, and the effects of continued population growth and an expanding middle class.

In the developed markets, the basic infrastructure is old and dilapidated, having been constructed in the middle of the 20th century. The percentage of gross domestic product being spent on infrastructure has been steadily declining for decades in most developed economies, leaving them with a crumbling legacy. This entire supply of old infrastructure needs to be either repaired or replaced.

In both cases, governments that are being squeezed by competing priorities are turning to funding sources outside of their traditional budgets to help pay for their infrastructure needs.

Often governments will partner with pension or sovereign wealth funds to pay for their projects. But there are ways individuals can invest in the infrastructure sector.

For the most part, investing in infrastructure involves purchasing either a direct or indirect equity or debt stake in a business that owns or operates an infrastructure asset. Investors can also cash in on the trend through companies that are not directly involved in owning or operating infrastructure assets, but instead benefit from construction, maintenance or other products and services that are involved in infrastructure.

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In either case, investors can buy shares of companies directly, or buy units in a fund that invests in these companies.

Shares of individual companies around the world can be easily purchased through brokerage accounts. Infrastructure-related funds available to Canadian investors include the Sentry Infrastructure Fund, the Renaissance Global Infrastructure Fund, the Dynamic Global Infrastructure Fund, and the North American Energy Infrastructure Fund run by LDIC Inc.

LDIC is a Toronto-based portfolio and fund manager. It launched its North American Energy Infrastructure Fund last April. Genevieve Roch-Decter is one of the team of portfolio managers at LDIC that choose the securities for the fund. She says the firm saw the dramatic increase in energy production in North America, and identified "midstream" companies, such as refiners and pipeline operators, as ideally positioned to take advantage of that trend – in part because they typically have contracts with energy producers that ensure their revenue regardless of fluctuations in commodity prices.

Ms. Roch-Decter says there are advantages for individual investors in using a fund to tap into infrastructure plays. "There are a lot of moving parts when it comes to this sector, and it's difficult to understand where we were, where we are and where we're going," she says, pointing to the example of the ongoing change for refiners and pipelines in North America from imported oil and gas to an export focus.

In addition to actively managed funds such as those run by Mr. Underhill and Ms. Roch-Decter's firms, there are exchange-traded funds that usually carry lower expenses and other fees. Those include the BMO Global Infrastructure Index ETF and the iShares Global Infrastructure Index Fund.

There are a few cautions when it comes to investing in the infrastructure sector. Mr. Underhill notes there are limits to the return upside, since governments and regulators often limit the revenue growth from specific projects by tying it to the rate of inflation. As well, in emerging markets with less stable political situations, the terms of infrastructure contracts can suddenly be revised by governments.

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Nevertheless, for investors looking for stable capital appreciation, income and a lower-risk way to tap into global growth trends, the infrastructure sector may be an attractive part of their portfolio.

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