Every four years, the American Society of Civil Engineers assesses America’s infrastructure and assigns grades based on its condition. In its most recent report card from 2021, it gave America a score of a C minus* - disappointingly low and pointing to clear despair in the country’s infrastructure.
But a big amount of help is now on the way. To revamp infrastructure in a sustainable way, the US has signed two acts into law – the Infrastructure Investment Jobs Act (IIJA) and the Inflation Reduction Act (IRA) – which combined will account for around $1.7trn in federal funding and incentives**. The knock-on effect is a huge opportunity for investors.
The IIJA will support the building of new roads, bridges, rail infrastructure, broadband networks, power networks, water supply and storage. The IRA aims to drive greater investment in ‘green’ technologies and renewable energy generation infrastructure, like factories to manufacture wind turbines or electric batteries, exclusively within the US, through subsidies, including tax credits.
Global infrastructure funds are already busy looking at ways they can benefit from this massive rush of government money. The VT Gravis Clean Energy Income fund, for example, provides exposure to the energy transition through a portfolio of companies that own and operate renewable and efficient power generation assets. “We stand to benefit from the tailwinds created by the IIJA and IRA in the US,” says Will Argent, investment adviser on the fund.
The IRA has reduced uncertainty and increased growth potential for US utilities, which make up around 40% of the global portfolio of the First Sentier Global Listed Infrastructure fund***. Manager Peter Meany believes efforts to accelerate decarbonisation and electrification will create new growth opportunities for utilities and “increase industry earnings growth from 2-4% to 5-7% per annum”.
“Tens of billions of dollars of capital investment will be required by major utilities each year to replace coal plants with wind and solar farms, add batteries and transmission lines, upgrade substations, build EV charging networks and roll out smart meters. For regulated utilities, all of this [government] investment is added to the rate base which in turn drives low risk earnings growth,” he says.
Renewable energy companies provide an obvious area for investors seeking to take advantage of the financial support of the IIJA and IRA to focus their attention. But many renewable firms are still young, untested, and not profitable, making them a much higher risk for investors.
This leaves fund managers to favour energy transition as a theme, which also features prominently in the M&G Global Listed Infrastructure fund. Manager Alex Araujo told us how he is actively engaged with companies along this journey, like AES Corp, a US utility once ineligible for his sustainability-conscious strategy due to its coal-fired power generation. It became an investment candidate when, seeing which way the wind was blowing, it decided to phase out coal completely by 2025, earlier than expected – a positive outcome for the company, shareholders, and the environment.
Perceived interest-rate sensitivity has acted as a drag on listed infrastructure as an asset class of late, with utilities and companies structured as REITs bearing the brunt of negative sentiment. The underperformance of US utilities this year, for example, has been the most extreme since the technology bubble in 1999****. But Alex is undeterred.
“Fear creates opportunity, and we strongly believe today’s valuation levels present a highly attractive entry point for long-term investors. Utilities and real estate are trading at their cheapest levels since the global pandemic, after which time both sectors were re-rated upwards significantly,” he points out.
Let’s not forget the opportunity for digital infrastructure. According to the US National Telecommunications and Information Administration, a staggering 1 in 5 households in the country are not connected to the internet*****. The Infrastructure Investment Jobs Act has allocated $65bn^ towards the social imperative of 'bridging the digital divide' by rolling out broadband connectivity.
Ben Forster, manager of the Schroder Digital Infrastructure fund, says digital infrastructure investors like him have already committed billions of dollars to increase fibre penetration to 100 million homes, “which will enhance the nation's economic productivity through access to education, healthcare and jobs”.
These Fibre To The Home (FTTH) projects offer investors attractive returns in densely populated cities, and now there are incentives to also build in under-served rural communities by subsidising build costs for another 30 million homes^^.
“This unprecedented Federal support is an exciting opportunity for fibre broadband developers and supply chain partners to rapidly scale up their operations, whilst still making an attractive return for their investors,” says Ben.
With over $1trn of government funding behind it in the US alone**, infrastructure, both physical and digital, is going to be a significant theme for the medium to long term, offering investors a variety of ways to ride the monumental wave of changes coming, at typically higher dividend yield and lower volatility than global equities.
The fund invests in a portfolio of securities listed in developed markets, involved in the operation, funding, construction, generation, and supply of clean energy. The investment objective of the fund is to generate income, preserve and grow capital over time and protect against inflation. The manager also invests in profitable companies that derive a significant proportion of revenue from increasing the efficiency of, and reducing the pollution from, traditional power generation and making consumption more efficient.
Much of the world still does not have access to the internet. This fund invests in the companies at the forefront of closing the connectivity gap, and with the potential to gain hugely from the push for worldwide internet access and improvement. The manager invests in developed and emerging markets, viewing both as offering unique opportunities.
Based on the fund manager’s analysis, many global equity managers hold less than 2% of their portfolios in infrastructure assets, and these positions tend to be concentrated in the larger utility names. Instead, the manager has generated much of the outperformance in this fund from growing mid cap stocks, such as toll roads, oil storage and gas utilities, which are often under-researched by global equity managers.
At least 80% of the fund is invested in infrastructure companies and investment trusts of any size and from anywhere in the world, including emerging markets. The fund usually holds shares in fewer than 50 companies. It invests beyond the traditional infrastructure (utilities, energy, and transport) into social infrastructure (health, education and civic) and growth opportunities in evolving infrastructure (communication, transactional and royalty). ESG considerations are integrated in the investment process.
*Source: Infrastructure report card, 2021
**Source: Deloitte, 16 March 2023
***Source: First Sentier, September 2023
****Source: M&G, September 2023
***88Source: National Telecommunications and Information Administration, 5 October 2022
^Source: The White House, 6 November 2021
^^Source: Dycom Presentation, August 2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.