Infrastructure Income — securing “life income”

If there were a shorter word for infrastructure I’d use it but every letter of this word is paying you!  Historically we know from the Roman aquaducts to the early railroads and utilities of this continent, infrastructure is vital, lasting, and brings rich income to its owners as well as growth to the wider economy.  It's also a valuable way to reduce risk and sustain income.   So let's explore why I describe infrastructure as among the five most vital “life income mandates”.

INFRASTRUCTURE.

You can google “Life Income Mandates” or visit further in the learning modules at www.GuaranteedIncome4Life.ca as I outline a 5-fold structure to secure life-income.  This includes five sources of income from:  (i) global dividends,  (ii) global real estate,  (iii) global infrastructure,  (iv) global fixed-income, and (v) when appropriate also Life-Payout-Annuities.  Today we visit infrastructure income.

Start with things we find in everyday life.

This is the easiest way to understand infrastructure.

(a) Consider highways where we choose to pay tolls rather than taking other routes.  These toll highways are never free. Costs keep rising.  And the owners get a good income from owning them.

(b) Look at your cell phone bill along with your landline, internet and TV access:  these are infrastructure known as telecommunications, and the owners or providers require a significant and rising income on their investment.

(c) Hospitals host another form of infrastructure with various forms of income.  Quite easily if you've parked at a hospital for $20 to $50 per day you can appreciate that as hospitals drain our wallets they're also a reservoir of ongoing income to owners.

(d) Pipelines, oil services, and energy terminals illustrate other forms of infrastructure …while governments and private sector negotiate their respective share of income.

Bridge_SecondSevern(e)  Railroads and highways, ports, all forms of shipping, airports, also fit into infrastructure.

(f) Water systems are vital as drought conditions and sewerage needs are increasing where population is most densely concentrated.  A worldwide priority is refurbishing and continued development of water access and treatment systems.

(g) Power generation from coal or natural gas, wind, solar, nuclear, and resulting electrical grids fit here too.  Was it 2003 when all of eastern North America learned what can happen when the grid goes down!

So infrastructure requires ongoing development to keep pace with growing population needs.  And all of these areas create income for the owners.  Let me remind you now -- you want to be among the owners of these types of investment!

Also characterized by . . .

Reviewing the above types of infrastructure we also find some interesting and useful dynamics.  (a) These are all assets that will continue in service for a long time.  (b) Several of these can host monopoly pricing that keeps rising.  (c) They produce resilient and predictable cash flows, attractive yield, inflation protection, and low-volatility earnings.  In any investment portfolio such characteristics prove to be very valuable in sustaining income and reducing risk.

Regulated versus User Pay 

Without going too long or deep here, we can distinguish "regulated" assets such as transmission and distribution of electricity, gas, and water, from “user pay” assets such as toll roads, airports, railways and ports.   This is a helpful distinction especially when we're seeking strong income while managing risk through periods of the economic cycle.

Regulated assets continue to pay reliable income through rosy peaks as well as recessions.  User-pay assets can spark higher income in a growing economy yet retract in times of recession.

A question to ponder therefore is how you would implement the "infrastructure income mandate".   Comparing bleak economic times against periods of economic expansion, when would you lean more to regulated assets, and when toward user-pay assets?   The answer to this question, and how it gets implemented, can help guard your income and reduce your risk.

What about Risk?  

I aim client portfolios to host an acceptable fraction of raw-market risk.  Obviously we build this based on the "investor profile" and their unique goals, objectives, and overall comfort now and through the years to come.  I believe if we can aim for 1/4 to 1/2 of raw stock-market risk while continuing to produce high income, clients will remain comfortable despite whatever noise rises on the news that day or season.

A useful litmus test would be 2008 / 2009.  Global equity dividends dropped 30% (equities dropped nearer 70% but dividends overall fell near 30%).   Yet infrastructure income continued rising through the global financial crisis.

I’d say personally, if income goes up like that when all else is falling, I’d want to own what goes up.   (* For clarity:  infrastructure values could drop, ie. be on-sale, when governments and corporations siphoned money from anywhere in order to manage a crisis, but that remained a valuable time to own infrastructure, as we’ll see next.)  

     5-year returns mid-2008 to 2013:

  • Global Infrastructure RARE 200 index:     7.3%  *
  • Global Property FTSE EPRA/NAREIT:     5.4%  *
  • Global Equity MSCI World Index:              3.7%  *
             * Compounded annually
 

Lacking or ignoring infrastructure is a hazard to financial health and wealth.  Infrastructure income can greatly reduce risk while sustaining current income and long term growth.

Where is infrastructure in your accounts today?

I can answer for my own clients.  It's a totally fair question to raise with any investment advisor who is serving you.  A recent letter I provided my clients itemized where infrastructure is positioned including dedicated funds of this name, and within other dividend, equity, emerging and frontier market funds.

This showed infrastructure as a component of dividend funds, ranging from 9% to 83%.  So not all dividend funds are built equally, as some are benefiting far more (and others far less) from the influence and stability of infrastructure income.  A surprising fact I shared was that a frontier market fund we use hosts >40% infrastructure.

If infrastructure were missing from your investment program, this could raise important questions for you.   Consider the stability of 2008-2013 shown above.  Consider the history; infrastructure lasts long and it pays!  Also realize, national and leading pension plans use infrastructure as at least 6% to 15% of their assets, locking in precious assets that will continue paying for decades.  You probably don't want to be lacking "infrastructure" as a mandate of your investment planning.

A well-known firm dropped the name:  why?

A manager called me last spring to mention they were dropping the name "infrastructure" from their programs.  They explained to me that advisors were not understanding the role of infrastructure and thought it to be a fad like technology or commodities.

Personally I feel there is a vast different between long-dated, low-risk, income-paying assets, setting infrastructure apart from tech or commodity bubbles.  So I replied that this was a great teaching moment to support advisors’ understanding and client-service.  The firm still changed the name of their fund, changing the focus to dividends.

Infrastructure Income for Life and Estate

I believe infrastructure income is one of five life income mandates that prove vital in any portfolio to pay you income over an extended time.  Retirement years will be safer if your investments can pay you this kind of stable and increasing income.  Our future life horizons will be safer as we preserve resources for personal care and comfort into our distant senior years.  This also protects or raises the estate values you can leave as inheritance for loved ones.

Let me know what you think?  Post comments below or reach me directly.

 

More in our learning modules at: guaranteedIncome4Life.ca
Amazon or Kindle: “A Lifetime Of Wealth — And How Not To Lose It.”
“Subscribe” — see on this page — to get upcoming insights and updates.
Brian Weatherdon, MA CFP CLU CPCA MDRT
 

4 comments

  1. Excerpt from Mark Mobius, Franklin Templeton, June 2015:

    “Emerging economies in general have experienced stronger economic growth trends than developed markets over the past decade, a trend that I expect to continue. That growth, combined with rising populations and a trend toward urbanization, requires more infrastructure. … Of the 10 most populous countries in the world, eight are in emerging markets… These people need food, clean water, energy, roads and housing. …

    “Not only do emerging markets need infrastructure improvements, but globally, existing infrastructure in many developed regions has aged and is in need of significant repair, replacement or upgrade.”

    (Full article: http://mobius.blog.franklintempleton.com/2015/06/25/building-for-the-future-infrastructure-in-emerging-markets/?utm_medium=markmobius&utm_source=email🙂

  2. “If you were to take a look at the Society of American Engineers’ annual report for 2014, we’ve got a $2.2 trillion dollar infrastructure shortfall just in the US, and because of fiscal deficit issues, that will not be met.”

    “The upside is that funding for schools, roads, bridges, utilities, water and other vital infrastructure in both the US and Canada will have to come from private investment. Recent statistics suggest that one-third of the assets in Canada’s 10 largest public PENSIONS are directed toward …private equity, real estate and infrastructure.

    “So where are these infrastructure opportunities?” …. The article speaks of countries with strong rule of law and enforceable property rights. It continues by specifically describing sewage and clean running water (unclean water is #1 cause of death among emerging markets).

  3. A consortium of Canadian pension funds is in process to buy Britain’s London Airport. Despite the restrictions of such an inner-city airport, the intent is clear — to generate a sustainable and growing income for people drawing pension income. More on this infrastructure investment at: http://business.financialpost.com/investing/global-investor/canadian-pension-plans-buy-london-city-airport-but-the-rich-price-could-drive-its-biggest-customer

  4. Canada Pension Plan update ending 2016 suggests domestic infrastructure opportunities are too small to meet CPPIB criteria. Of CPP’s $300 Billion assets, 80% are currently outside Canada, with the goal to reach 85%. See more directly at this link in the Globe and Mail Nov 2/16: http://www.theglobeandmail.com/report-on-business/cppib-head-cautious-on-canadian-infrastructure/article32617837/ ….or shorter clips below from that article.

    “The head of Canada Pension Plan Investment Board is taking a cautious approach to infrastructure investments in Canada as it retools its portfolio to manage the challenging investment environment … (in terms of) its need for independence and evolving approach to risk. On the topic of infrastructure – a major, multibillion-dollar federal government spending priority – the pension fund said it would need to see investment opportunities that meet its specific criteria in order to participate in the spending boom.

    “CPPIB …buys portions of toll roads, shipping ports and pipelines in may parts of the world and receives a relatively steady flow of fees in return. The fund needs to write cheques for more than $500-million to make these investments manageable and worthwhile. …conditions rarely satisfied by the infrastructure assets available in Canada, although the largest infrastructure investment the pension fund owns is in Canada – the Ontario Highway 407 toll road. “That’s been one of the biggest challenges in Canada, and around the world, is there’s just not been enough of those scale opportunities in size, but also that are prepared for our type of investments” (Mark Machin, CEO).

    “When pressed on the stress that changes in government and policies would put on an infrastructure investment years in the future, Mr. Machin said this would be one of the major risks. “Infrastructure investments are, by nature, very long-term investments. And therefore the stability of regulatory regimes [and tax regimes] around those investments is very important,” Mr. Machin said.”

Leave a commentLeave a Reply to Brian Weatherdon