Value Investment Strategies: Infrastructure

By Aline Wealth Management on August 1, 2018

Infrastructure is an essential pillar of our society. Facilities and services from bridges and tunnels to railways and airports serve as the backbone for economic productivity. In spite of this U.S. infrastructure has aged and eroded to levels of troubling disrepair. This deterioration is a direct consequence of low level investment in maintenance and development. The 2016 U.S. Census Bureau reports infrastructure spending, adjusting for inflation and real GDP growth, has decreased at an annualized rate of -0.2%. The result of such inaction is a massive infrastructure funding gap and a D+ rating by the American Society of Civil Engineers (ACSE). The amount of investment needed to close the spending gap will be tremendous. ACSE has determined the nation will need to spend $3.3 trillion from 2016-2025 and an excess of $10.8 trillion by 2040. In their report, the ACSE notes the severe negative economic outcomes. Infrastructure shortfalls could result in a loss of $4 trillion of GDP and 2.5 million jobs by 2025.

POTENTIAL VENUES FOR SPENDING STIMULUS
There are various mechanisms by which infrastructure development could be stimulated.
At local levels:
1) Use of public funds by state and local governments for new infrastructure projects through the issuance of tax-advantaged muni bonds.
2) Public-private partnerships where private companies bid for public infrastructure projects.
3) Tax increment financing (TIF) to fund infrastructure development projects.
At federal levels:
1) Passage of infrastructure spending bills by federal government.
2) Passage of tax incentives for infrastructure spending by Congress
3) Reduction of regulatory obstacles to reduce costs and accelerate project development

APPEAL FOR VALUE INVESTORS
Infrastructure investing can provide several benefits for the value investor’s portfolio. These benefits become more readily apparent in times of market uncertainty and volatility. Transparent regulatory environments and long-term contracts mean infrastructure assets, such as utilities and transportation, can provide more consistent cash flows. Additionally, the nature of the sector is providing essential goods and services where prices and usage are relatively insensitive to periods of economic downturn. Political and regulatory changes are the primary risk factors impacting the sector. Lastly, there exists opportunity for value enhancement through active management. Infrastructure assets exist on a spectrum with differences in risk and return. It is up to the value investor to weigh the merits of each asset class and the needs of the client portfolio in choosing where to invest.

Sources:
1. Bloomberg, S&P (2017)
2. American Society of Civil Engineers, ‘Failure to Act’, 2016