Infrastructure investing provides attractive opportunities to investors looking beyond traditional asset classes to diversify their holdings.
Investing in infrastructure means you’re putting money into companies that own and operate essential public assets.
These assets are usually necessary services to the community and include the following:
- Toll Roads
- Water and electricity supply
- Communication Assets
- Hospital and education facilities.
Steady, predictable returns
Given their history of being government owned/managed, infrastructure assets are generally monopoly-like in the markets they serve. So they are considered relatively safe from a weak economy.
Take toll roads for example. Generally, a toll road is not the only route available to drivers, but most of the time they exist as a faster alternative to free routes. They therefore become monopolistic, as regular drivers face no other real alternatives.
Infrastructure investing is attractive for investors looking for steady, predictable returns with less volatility than other companies . As such, they can be a great addition to a diversified portfolio.
Pros and cons of infrastructure investing
Here are some of the pros and cons of investing in infrastructure.
- Infrastructure assets are generally monopolistic with little competition;
- Relatively insensitive to an uncertain economy;
- Somewhat protected from inflation;
- Provide a steady, relatively high-income yield.
- Subject to political and regulatory risk (government needs to be willing to spend on infrastructure);
- Development risk (construction and development of infrastructure assets can take many years and require significant capital);
- Operational risk (careful asset management is essential to strong financial performance)
Infrastructure companies face risks that are different to other asset classes. They are relatively insensitive to economic factors, but more susceptible to a set of uncorrelated risks as mentioned above.
Having said that, infrastructure investing is a good way to diversify your overall portfolio and provide a stable income stream. The income generated is mostly inflation protected, meaning they provide a hedge against the rise in prices of goods and services over time.
That said, it is important to consider your personal financial circumstances and how infrastructure may fit in your investment portfolio.
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This is an edited version of an article that originally appeared on Align Financial and is republished here with permission. This article contains general information only. This should not be relied on as independent finance or tax advice. If you are after specific professional advice, speak to your registered tax agent/financial advisor or reach out to Darren at Align Financial.