Question:  

As an individual investor, how can I add infrastructure investments to my portfolio?

Answer: 

Historically, infrastructure has drawn the exclusive attention of institutional investors. We’re seeing more individuals noticing these opportunities understanding that portfolio diversity is a key to success. Investing in infrastructure is one option that may help optimize your portfolio and make a positive and meaningful impact on your community. 

Infrastructure Investment Options

Tangible assets with intrinsic value are drawing attention form a variety of investors looking for opportunities that may provide lower correlation to traditional asset classes. Individual investors looking for long-term stable returns may find that adding infrastructure investments could be a good fit for them. Here are a few ways to enter this arena.

Debt 

Debt securities, such as municipal bonds (Munis) issued by local and state governing bodies, offer tax advantages for high-income investors. Investors who choose to loan their capital as municipal bonds to local governments benefit from tax-free interest. For investors in states with higher income taxes, for example, California, New York and others, the taxable equivalent returns on lower risk municipals can approach equity-like returns in the current market.

Muni bonds add diversification to portfolios. Capital funds often go towards more than one specific asset, project, or building with investments in public infrastructure, from roads and green spaces to water systems and public education buildings. Infrastructure investments that are slightly higher in risk are stadiums, convention centers, hospitals, and universities. 

Fun facts: Investments in municipal bonds aren’t appropriate for all investors, especially those who won’t benefit from the tax status of the investment. Municipal bond interest income is not subject to federal income tax but may be subject to state and local taxes and, for certain investors, to the alternative minimum tax (AMT). Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

Equity                                                                                                                                 

Infrastructure equity investments offer cash flows from long-term contracts, as well as returns that are less sensitive to economic cycles when compared to other investment classes with two options: private or public equity.

Private equity involves direct investments in private companies not listed on the stock exchange. While private equity may offer competitive returns, the tradeoff is limited liquidity. In contrast, public equity investments are listed on the stock exchange. They most typically attract investor interest through diversification and greater liquidity, with a compromise and at the cost of typically being more volatile.

Equity REITs (real estate investment trusts)                                                                              

Equity REITs are the most common form REITs. These allow investors to own and manage commercial real estate properties such as office buildings and shopping centers. They function similarly to mortgage revenue bonds but offer different risk profiles and convey distinct benefits. The ability to pool funds provides investors with the opportunity to take advantage of real estate assets that they may not have been able to buy on their own. Access to broader investment opportunities can lead to broader portfolio diversification.

More fun facts: REIT prices will fluctuate with the value of the underlying properties, with redemption price higher or less than the original price paid. REITs can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates, all present potential risks to real estate investments. Other risks include lack of liquidity and devaluation based on adverse economic and regulatory changes. 

Benefits of Diversification                                                                                                   

Adding infrastructure to a traditional stock-bond portfolio offers the potential for meaningful improvements in both return and risk. Not only do these types of investments offer a potentially higher yield, but certain projects may provide lower volatility. Infrastructure investments may also provide stability and forecastable cash flows. 

Communities benefit during projects as jobs are created from the planning to the implementation phases to include everyone from engineers to laborers. When completed, local infrastructure projects can have a transformational impact on a community. The time and effort put forth to complete large-scale projects can take months, sometimes years, which can have a lasting impact on the local area and even stimulate the economy.

Infrastructure investments have previously shown their ability to help diversify portfolios and make a wider, positive impact on the communities where we live and work. Your trusted financial advisor can collaborate with you to determine which infrastructure investments may be a good fit for your risk profile and financial goals. Stay focused and plan accordingly.