Impact of local infrastructure investments on a portfolio
Infrastructure has historically drawn the attention of institutional investors. But now individual investors are starting to take notice.
For the savvy private wealth investor, portfolio diversity is key to success. Investing in infrastructure is one option that can help you both optimize your portfolio and make a positive and meaningful impact on your local community.
Infrastructure investment options
Tangible assets with intrinsic value have drawn renewed attention from a variety of investors seeking opportunities that offer lower correlation to traditional asset classes.
While institutional investors may have once been the most natural fit for infrastructure investments, the risk profiles of individual high-net-worth investors – seeking long-term, stable returns – are proving to make infrastructure investments a good fit for them, as well.
Private debt and 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 munis 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.
Munis also make for a diverse portfolio addition, because as an investor you’re not investing in one specific asset, project or building. Invested capital funds public infrastructure, from roads and green spaces to water systems and K-12 public education buildings. Infrastructure investments that are slightly higher in risk are stadiums, convention centers, hospitals and universities.
Underwriting state and local housing agencies for single-family mortgages and multifamily housing projects are an attractive option for investors looking to broaden their portfolio exposure to encompass more housing – and therefore infrastructure – investments.
Infrastructure equity offers reliable cash flows from long-term contracts, as well as returns that are less sensitive to economic cycles compared to other investment classes. Plus, equity provides investors with a couple of 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, investors must compromise by navigating limited liquidity. Public equity investments are listed on the stock exchange. They most typically attract investor interest through diversification and greater liquidity, at the cost of typically being more volatile.
Equity REITs (real estate investment trusts)
The most common form of REIT, equity REITs, enable 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 yield 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, while allowing you to leave a lasting legacy on the places that matter to you.
The benefits of diversifying your portfolio with infrastructure investments
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 can provide lower volatility.
Another weighing factor for investors is stability and forecastable cash flows that local infrastructure investments can deliver. Real estate and infrastructure are economically robust sectors, because even in recessions people continue to need spaces to rent, live and work. Not only can you strongly align your investments with your values, but you can also direct capital in a way that helps grow your local community.
A positive community impact
When completed, local infrastructure projects can have a transformational impact on your community. But the local community can also benefit during the project too. Infrastructure spending creates jobs from the planning to the implementation – involving everyone from engineers to laborers. 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 while making a wider, positive impact on the communities in which we live and work. Your financial advisor can work with you to determine which infrastructure investments may be a good fit for your risk profile and financial goals.
Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT’s will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid.
Real estate investments 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.
Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes.
Income from municipal bonds is not subject to federal income taxation; however, it may be subject to state and local taxes and, for certain investors, to the alternative minimum tax. Income from taxable municipal bonds is subject to federal income taxation, and it may be subject to state and local taxes.
Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.