There’s a famous New Yorker cartoon that we don’t have permission to reproduce. It shows a cheerful executive speaking from a lectern in a conference room.
And so, while the end-of-the-world scenario will be rife with unimaginable horrors, we believe that the pre-end period will be filled with unprecedented opportunities for profit!
Welcome to the case for infrastructure investing in a world where the global climate has been allowed to become increasingly hostile to human life.
Climate change as a catalyst for infrastructure investing
The underlying argument is simple.
- Infrastructure is the umbrella term for all of those creations which make modern society possible: roads, harbors, drinking and wastewater systems, the internet-of-things, fuel pipelines and power grids, and so on.
- Our infrastructure, much dating to the early 20th century, was never designed for the world we’ve created. In the simplest example, rising sea levels drive rising groundwater, which floods buried infrastructure – water, gas, electric, phones – that was designed to sit well above the water table.
- Politicians can ignore global climate change. And have.
- Politicians cannot ignore infrastructure collapses. While climate change is distant, abstract and somebody else’s problem, the collapse of a city’s water treatment is an existential threat to state and local politicians. They will
Up until now, our infrastructure has suffered benign neglect. Bridges that haven’t yet collapsed get repainted rather than rebuilt. US drinking water systems that haven’t been maintained lose about 2.1 trillion gallons of water each year, but mostly the taps still work so we have ignored the need for $500 billion in water-related investments (Report Card for America’s Infrastructure, 2021). Victorian-era sewage systems are common and are prone to failure during increasingly common “once in 500-year” storms (“Climate change could overwhelm our sewers,” The Conversation, 12/17/2024). The number of weather-related power outages has increased by 80% since 2000 and the length of the average outage has doubled. The US Department of Energy places the cost of outages at $150 billion / year. The good news is that the US spends about $27 billion / year to maintain its grid. The bad news is that we need to spend $700 billion to balance rising demand with ancient failing equipment.
Climate change has the potential to trigger cascading failures that will move trillions from the “someday” list to the “today” list. Amrith Ramkumar, writing for the Wall Street Journal, made the case succinctly:
Efforts to address the cause of climate change have fallen short so far. That is leading to a big push to treat the symptoms.
Government and private money is pouring into plans to control flooding, address extreme heat, and shore up infrastructure to withstand more severe weather caused by climate change.
For private-sector investors, putting money into adaptation is a bet that mitigation won’t fully address climate change or will take longer than expected. The cost of adaptation is immense, particularly if mitigation efforts are delayed. The longer society waits to address climate change, the more it will spend to fend off the impact of hotter, wetter weather, researchers say. (“Climate Cash Pivots to New Reality of a Hotter, Wetter Planet,” WSJ.com, 8/1/2024)
Increasingly, investors suspect that “the pre-end period will be filled with unprecedented opportunities for profit.” Ed Ballard reports,
Another set of climate-change investments is now coming into focus: the businesses that will help us live on a hotter planet. For investors, adaptation and resilience have been an afterthought. …But net zero is a long way off, and heatwaves, storms, and wildfires are intensifying. Governments are under growing pressure to close an adaptation funding gap tallied in the trillions.
Investors are looking for companies that will make money if the gap is closed. A report by BlackRock published in December pointed to rising demand for products and services that build resilience to climate change, like air filters that help during wildfires and financial derivatives that allow for hedging weather risk.
“We think markets likely underappreciate the extent of that growth,” BlackRock wrote. (“Could Adaptation Be the Next Climate-Finance Gold Rush?” Wall Street Journal “Climate and Energy” newsletter, 3/14/2024)
Sectors that provide compelling investment opportunities
Where might those opportunities center? Climate instability may drive additional or accelerated spending in a number of areas.
- Addressing aging and vulnerable infrastructure: Many US infrastructure systems are aging and increasingly vulnerable to climate impacts. There will be a need for major investments to repair, upgrade, and modernize critical infrastructure like roads, bridges, water systems, and the electrical grid to make them more resilient to extreme weather and changing climate conditions.
- Improving resilience to extreme weather: More frequent and intense storms, floods, heat waves, and other extreme weather events are damaging infrastructure. Significant investments will be needed in flood protection, stormwater management, heat-resistant materials, and other resilience measures.
- Transitioning to clean energy: The Bipartisan Infrastructure Law provides over $65 billion for clean energy transmission and grid upgrades to facilitate the expansion of renewable energy. This represents the largest-ever US investment in clean energy transmission. It seems unlikely that the incoming administration will rescind funds beloved by its corporate friends.
- Expanding sustainable transportation: Major investments are planned for public transit, rail, electric vehicle charging networks, and active transportation infrastructure like bike lanes and pedestrian facilities to reduce emissions from the transportation sector.
- Protecting coastal areas: Rising sea levels and more intense coastal storms will drive investment in natural and built coastal defenses, managed retreat from high-risk areas, and upgrades to coastal infrastructure.
- Addressing environmental justice: There will be a focus on directing infrastructure investments to disadvantaged communities that are often most vulnerable to climate impacts. Lest you think this is the dead fantasy of a liberal regime, “red” states are likely to face the greatest economic risks from climate change. Despite their populations and elected officials being less likely to acknowledge the threat, the impacts are likely to be disproportionately felt by the poorest regions within these states. Internal migration to Florida has already collapsed, with the state’s population growth dependent almost entirely on international migrants (hah!). Texas faces more billion-dollar weather events than any other state: from 1980 – 2000, about three events a year (CPI adjusted dollars) which has spiked to 12 disasters a year in the past five years.
- Implementing natural infrastructure: Many anticipate increased use of natural systems like wetlands, forests, and green spaces to provide flood protection, heat reduction, and other climate resilience benefits.
- Upgrading water infrastructure: Investments in water conservation, reuse, flood management, and resilient water supply systems to deal with droughts, floods, and other climate-driven water challenges. The EPA estimates the needed upgrades at north of $20 billion / year, pretty much forever.
How does Mr. Trump play into all this?
Be danged if I know. The incoming Trump administration’s likely actions present both opportunities and challenges for infrastructure investing in 2025 and beyond. Here are key ways the administration may strengthen or weaken the case for infrastructure investments:
Continued Government Spending
The Trump administration is expected to maintain significant infrastructure spending, with nearly $294 billion of the Infrastructure Investment and Jobs Act (IIJA) funds still to be allocated. This ongoing federal investment provides a strong foundation for infrastructure growth and development across various sectors.
Streamlined Regulations
Trump’s pledge to reduce bureaucratic red tape and expedite infrastructure projects could accelerate the construction and repair of critical systems. This streamlining of regulations, particularly targeting the environmental impact assessments required by the National Environmental Policy Act (1970), may lead to faster project approval (think “nuclear power plants”) and potentially higher returns for investors.
Focus on Energy Infrastructure
The administration is likely to prioritize expanding and modernizing energy infrastructure, including pipelines, refineries, and distribution networks. This focus could create substantial investment opportunities in the energy sector, particularly in fossil fuel-related infrastructure. (sigh) Trump’s administration may reallocate funds away from public transportation, high-speed rail, and electric vehicle infrastructure. (Sorry, Elon.)
Emphasis on Public-Private Partnerships (P3s)
Despite past skepticism, the Trump administration may embrace P3s as a means to modernize infrastructure and reduce federal debt. This approach could open up more opportunities for private investors to participate in infrastructure projects.
Trade policies are a wild card since much of what we need to accomplish is reliant on imported materials, technologies, and workers. (Depending on region and specialty, immigrant workers account for 30-50% of all skilled and unskilled construction laborers in the US). Republican-led budget-cutting measures could lead to reduced federal funding for some infrastructure projects which would increase reliance on state and local funding, potentially affecting the scale and scope of certain infrastructure investments.
Even without climate change serving as an accelerant, infrastructure funds have produced competitive and uncorrelated results over the past 15 years. Benjamin Morton, head of global infrastructure at Cohen and Steers highlights the group’s characteristics:
Listed infrastructure has little overlap with broad equity allocations, accounting for just 4% of the MSCI World Index, and provides access to subsectors and investment themes that are typically under-represented in broad equity market allocations.
Performance data over the past 17 years indicates that listed infrastructure offers the potential for:
- Competitive performance relative to global equities, with total returns averaging 7.2% per year
- Lower volatility, supported by the relatively predictable cash flows of infrastructure businesses
- Improved risk-adjusted returns, as measured by a higher Sharpe ratio
- Resilience in down markets, with infrastructure historically experiencing 74% of the market’s decline, on average, in periods when global equities retreat
In 2022, in an environment characterized by slowing growth, rising interest rates, and high inflation, infrastructure substantially outperformed broader stocks. This was consistent with infrastructure’s history of resilience and relative outperformance in most equity market declines. (Essential assets: The case for listed infrastructure, 10/2023)
Funds for infrastructure investors
You need to consider two factors before creating your shortlist of possible portfolio additions:
- Active or passive? The argument for active management revolves around the high degree of uncertainty about the direction of the Trump administration’s policies, both those directly aimed at infrastructure but also those impacting international currencies and trade.
- Focused or diversified? You might choose to express broad optimism for infrastructure investments, or you might find a reason to target particularly investments in energy infrastructure. Within energy, you have the option of targeting “next-gen” sorts of companies or traditional pipeline ‘n’ power people.
This is all complicated by the fact that the number of funds that name themselves “Infrastructure” far exceeds the number of funds (and ETFs) that Morningstar or Lipper place in their infrastructure categories. Lipper, for instance, recorded 92 funds named “infrastructure” but placed only 33 in the “global infrastructure” category. As a result, some “infrastructure income” funds reside in “core-plus bonds” while others are classified as utility, global infrastructure, natural resources, or energy MLP funds. That makes direct comparisons hard. We screened for every fund with “infrastructure” in its name and then reviewed its performance and mission.
Three-year performance and characteristics of profiled funds
Diversified and active
Centre Global Infrastructure Fund (DHIVX): DHIVX pursues long-term capital growth and current income by investing in infrastructure-related companies from developed global markets. The fund employs a bottom-up, active management approach, focusing on what manager James Abate deems the most attractive infrastructure opportunities. It aims to balance exposure across telecommunications, utilities, energy, transportation, and social infrastructure industries. The key diversifier here is the fund’s structural mandate to invest about one-third of its assets in “social infrastructure,” such as hospitals. Mr. Abate has a concentrated, low-turnover portfolio here and also manages the four-star Centre American Select Fund. DHIVX was the top-returning infrastructure fund of 2024.
Fidelity Infrastructure Fund (FNSTX): This is a five-year-old fund with just $50 million in AUM, which is rare for Fido. About 70% of the current portfolio are American companies in the full spectrum of infrastructure industries: airports, highways, railroads, and marine ports; electric, water, gas, and multi-utilities; oil and gas storage and transportation; and communications infrastructure, such as cell towers. The fund has four-star ratings from both Morningstar and MFO.
Lazard Global Listed Infrastructure Fund (GLFOX): This 15-year-old fund is the 800-pound gorilla of the category, weighing in at $9.1 billion. Infrastructure encompasses utilities, pipelines, toll roads, airports, railroads, ports, telecommunications “and other infrastructure companies” (sigh). The managers target “preferred infrastructure” companies, mid- to large-caps which are characterized by “longevity of the issuer, lower risk of capital loss and revenues linked to inflation.” Unlike the Fidelity fund, this is a primarily international fund with 75% in non-US investments. I’m distinctly unimpressed that only one of four long-time managers has invested even a penny in the fund.
Diversified and passive
Global X U.S. Infrastructure Development ETF (PAVE): This ETF offers broad exposure to U.S. infrastructure development companies and has shown strong performance. PAVE has outperformed its benchmark and category, making it an attractive option for long-term growth investors. The key is that it has both high upside capture and high downside capture, with Morningstar giving it a “high” in both risk and return. This is the largest infrastructure ETF at $8.5 billion. It has a five-star rating from Morningstar and is an MFO Great Owl Fund which signals top-tier risk-adjusted performance across all trailing periods.
iShares Global Infrastructure ETF (IGF) and SPDR S&P Global Infrastructure ETF (GII) are the sort of Frick and Frack of infrastructure ETFs. Both are passive, equity, about 50/50 US and international, about 3% yield, about 0.4% expenses, with identical Morningstar and MFO ratings.
Focused and active
Eagle Energy Infrastructure Fund (EGLAX): The fund makes long-term investments primarily in energy infrastructure in the “midstream” transportation and storage segment of the energy supply chain. These are long-lived, high-value physical assets that are paid a fee for the transportation and storage of natural resources. It’s structured to minimize that tax drag typical of MLP investments. The Eagle Global team is based in Houston, stable, experienced (on average, 18 years), and heavily invested in the fund. It has been recognized as a Lipper Leader for consistency for the past 3-, 5- and 10-year periods. It has a five-star rating from MFO and a four-star rating from Morningstar.
Focused and passive
First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID): The fund invests in companies that are primarily engaged and involved in electric grid, electric meters and devices, networks, energy storage and management, and enabling software used by the smart grid infrastructure sector. It focuses on clean energy infrastructure and smart grid technologies. By design, 80% of the portfolio are “pure play” companies (e.g., the Swiss energy engineering firm ABB), and 20% are diversified (e.g., Johnson Controls). GRID is suitable for investors interested in the growing renewable energy and smart infrastructure sectors. It has a five-star rating from Morningstar and a four-star rating from MFO.
Infrastructure income
These are two very different funds for investors anxious to maximize income generation.
DoubleLine Infrastructure Income (BILTX): This is the only bond fund in the infrastructure world, with all other “infrastructure income” plays focusing on stocks and partnerships. It brings a value-oriented discipline to investing in infrastructure-related debt: debt that finances airports, toll roads, and renewable energy, as well as debt secured by infrastructure-related assets such as aircraft, rolling stock, and telecom towers. The fund has been around since 2016 and has consistently outperformed the US Aggregate Bond Index in every trailing period.
NXG NextGen Infrastructure Income Fund (NXG): this is a closed-end fund that invests in equity and debt securities of infrastructure companies, including energy infrastructure companies, industrial infrastructure companies, sustainable infrastructure companies, and technology and communication infrastructure companies. The ideal targets are responsible and sustainable investments in companies that have a high degree of demand inelasticity; that is, those with predictable, consistent revenues regardless of the state of the economy. Because it has the ability to use leverage, yields are in the double digits. It’s probably best used by folks already comfortable in the wacky world of CEFs, but it’s got an interesting take.
For financial professionals with an interest in the area and a fairly large AUM, Versus Capital Infrastructure Income Fund (VCRDX) offers an intriguing option. It’s a new fund from a firm with a long track record in infrastructure investing. It targets private, rather than listed public infrastructure, investments. It’s structured as a closed-end interval fund with a high minimum, which both serves to allow it access to illiquid investments and to screen out speculators.
Bottom line
At their worst, the diversified infrastructure funds nestle nicely in the large-cap, value-to-core style box. At their best, they offer investors a chance to generate above average income and potentially high long-term returns if infrastructure investing does indeed boom, generally with lower-than-average volatility. If we are to survive an unstable climate and transition from a world not built for this to one that can sustain us despite it, they’re worth your time.