Infrastructure
By Tony Rochte

The world is growing. As generally reported, China is booming; emerging markets are finally starting to emerge; even developed economies in the U.S. and Europe are enjoying a long period of sustained economic growth. What does that all mean? For one, growing demand for the stuff that makes the world go round, or in a word: infrastructure.

In the past, investors muddled together the terms "Infrastructure" and "Utilities." This was done for good reason: there were few publicly traded infrastructure investments outside of the Utilities sector. Today, however, things have changed the broad growth in global demand for infrastructure-matched with rapid evolution in the financial marketplace-has created new opportunities for exposure to everything from airports to roads, schools, mobile phone towers and more.

This opening up of the infrastructure market has sparked widespread interest in the media. It is hard to open The Wall Street Journal these days without reading about a new toll road, an expanded airport, or a public/private stadium deal. But while institutional investors and private equity firms have long been aware of the infrastructure space, individual investors are just starting to take notice.

As yet, the dynamics of the infrastructure sector are poorly understood: the vestigial confusion with "utilities" remains and the unique attributes of the more diversified (and diversifying) infrastructure market are not well established. This article aims to correct those failings and make the following points:

1. Infrastructure can be considered its own asset class;
2. Indexing is a highly effective approach to investing in the asset class; and
3. The infrastructure sector today bears several similarities to the market for real estate investment trusts (REITs) during the early-1990s, and may likewise be positioned for strong growth.

Beyond these objectives, we examine potential drivers of growth for the asset class, and lay out the case for making an investment in the space.

Is Infrastructure Just A Fancy Word For Utilities?
As mentioned, many investors fail to make the distinction between "Utilities" and "Infrastructure." Under the Global Industry Classification System, or GICS, the Utilities sector is defined as follows:

The GICS Utilities Sector encompasses those companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power. This sector includes both nuclear and nonnuclear facilities.

One of the leading indexes of the newly developed Infrastructure space is the Macquarie Global Infrastructure 100 Index, from the Australia-based Macquarie Bank. Macquarie defines the infrastructure sector as follows:

All companies that are involved in providing the foundation of basic services, facilities, and institutions upon which the growth and development of a community depends.1

This includes economic infrastructure (airports, roads, ports), utilities (water, gas, electric), social infrastructure (schools, hospitals, stadiums), and commercial infrastructure (satellites, mobile phone towers, cable networks). In other words, "Utilities" in the classic sense is a sub-segment of the broader "Infrastructure" space.

The differences between the two markets translate into different risk/return profiles. Figure 1 compares the core financial statistics of the Macquarie Global Infrastructure 100 Index and the S&P/Citigroup US Utilities BMI Index.

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