Theres a new interest and urgency in infrastructure investing due to shifts in energy sources, climate change, and catching up on years of underinvestment across the globe.

Alina Osorio, president and CEO of Fiera Infrastructure, a leading investor in infrastructure based in Toronto, says that as an industry, infrastructure continues to grow due to this spending gap.

The McKinsey Global Institute has estimated that between 2016 and 2030 the investment in global infrastructure projectslike energy, telecom, transportation, and water systemsneeded just to support anticipated growth rates is about US$3.3 trillion a year.

Whats happening for one of the first times in my career is that were seeing this convergence of the supply sidethe underinvestment recognitionand more and more projects coming to the market for private capital, Osorio says.

Infrastructure spending is a key element of Democratic presidential campaigns, including US$1 trillion proposals from Michael Bloomberg and Pete Buttigieg; President Trump once pledged a similar investment, though it hasnt come to pass.

Osorio says the conversation is global and that a number of developed and developing economies have attractive long-term investment opportunities. India, for example, has a five-year, US$1.5 trillion plan for infrastructure spending where private companies will make up about 25% of investments.

Investing in the U.S. Market

In the U.S. market, Osorio says energy is an attractive area in which to invest.

Were always considering that very important subsector, but we look for investments out of pure energy that really help diversify your holdings, she says, like renewables.

Fieras focus, she adds, is not your traditional energy in the sense of midstream and pipelines.

Osorios also hopeful the increasing demand for social infrastructure, such as hospitals, housing, and roads, means public-private partnership procurement models will continue to gain greater acceptance and attractiveness.

Telecom infrastructure, in particular fiber, is another area she has her eye on due to the increased need for data transmission and the deployment of 5G networks.

Because people need social assets for everyday use and due to their high correlation to an economys productivity, Osorio says they tend to be quite stable and predictable from a cash flow perspective and provide downside risk.

Infrastructure investments can even track and protect against inflation.

When you tend to put [infrastructure investments] through an asset liability study... it does spit out quite a suggested strong allocation for the asset class, she says.

Seek Unlisted Infrastructure

Osorio says its important for investors to specifically seek out alternative products that invest in pure play infrastructure, beyond traditional stock market opportunities.

For [higher net worth investors], I think it is important for them to seek access to private capital infrastructure, she says.

In some countries, these investments have been allowed and encouraged for many years.

Osorio advises this because she says private capital infrastructure investments are both close to the asset or projects and more directly managed to explicitly provide attractive returns for investors.

While she notes there are a number of utility stocks in the public markets, they tend to be large, vertically integrated companies that have a number of operations.

Unlisted infrastructure is less correlated with the public markets and provides more of the characteristics that make infrastructure allocation attractive for a diversified portfolio, she says.

Role of Regional Forces

Osorio says one of the challenges particular to infrastructure as an asset class is accounting for regional differences.

Its a very global asset class, but also important to note is that its subject to a lot of regional forces, Osorio says.

This is why she encourages diversifying not only among the asset class itself, but across different geographies to mitigate risk.

When investing in renewable energy, for instance, she says investors might hit a period where for a year or two, a resource like solar or wind power may be impacted due to climate change or weather patterns.

Regulated utilities are another challenge, she says, using the example of an unfavorable rate hearing that impacts an investments performance.

This is a fine balance which can swing in either direction, from time to time, she says, noting its a consistent challenge across all countries Fiera invests in.

By having a diversified portfolio, however, investors can offset challenges or risk in one area, with assets in other jurisdictions.

Mix Yield and Capital Appreciation

When Fiera puts portfolios together, Osorio says it looks beyond the assets and projects that constitute them at the mix of returns.

As an investor Id be seeking a balance between yield and capital appreciation, she says. Yield tends to come with stable, core investments which are probably on the lower-returning side but will give you nice cash yields.

On the flip side, she adds, Fiera invests in what they call Core Plus investments. These tend to be investments that have higher growth prospectsand therefore higher returnsbut require reinvesting the capital back into the business.

You tend to give up a little bit of yield, but then through portfolios, you can do a combination of both yield and capital appreciation, she says.

Roughly speaking, Osorio adds a good rule of thumb is targeting half of a portfolios expected returns from yield and half from capital appreciation on a blended basis.

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Future Returns: How to Invest in Global Infrastructure - Barron's