Sunday, September 20, 2020

A Bridge Over Troubled Water?

ASK THE CFP® PRACTITIONER


 

 

“Move fast with stable infrastructure.” ~Mark Zuckerberg, CEO of Facebook

Question: Our nation’s infrastructure problems are obvious. With the Trump Administration’s commitment to fixing the problems, what are your thoughts on this sector?

Answer: It’s easy to agree that we need to maintain and upgrade our infrastructure. If these issues aren’t addressed, the American Society of Civil Engineers (ASCE) says we could forfeit $4 trillion in GDP and lose at least 2.5 million jobs over the next decade. Even former Vice President Joe Biden recognized the issue, saying that New York’s LaGuardia Airport resembled a “third world country.”

The term “infrastructure” applies to more than bridges and roads. It includes electricity, energy, railways, airports, shipping, water, and telecommunications. These essential services are literally the foundation of daily life allowing our economy and society to function and run smoothly.

According to the McKinsey Global Institute’s 2016 analysis “Bridging Global Infrastructure Gaps,” there is a need for $49.1 trillion of investment through 2030. There’s plenty of room for opportunity in this area. The upfront costs for essential services are high yet the resulting cash flow is known to be stable. As an investment sector, this area could be less volatile than others, although projects and resources are often dependent on economic cycles and government budgets.

Modern Portfolio Theory (MPT) is an investment theory designed by Henry Markowitz in 1952 that’s still used today to construct portfolios. While we know that no strategy can guarantee success, MPT is based on the premise that proper diversification and asset allocation may optimize and maximize risk adjusted performance. Volatility and correlation to other asset classes is part of this concept. Characteristically, the infrastructure asset class doesn’t have a strong correlation to other asset classes and may improve risk-adjusted returns over an entire market cycle.

Infrastructure investing goes beyond utility and construction related opportunities. The universe of infrastructure requires design, maintenance and other factors including: 1) Monitoring of water and wastewater including filtration and transportation; 2) Telecommunications services and equipment; 3) Energy efficiency

 

 

services and equipment; 4) Roads, bridges, ports, buildings and the necessary equipment; 5) Engineering, management and logistics expertise for all of the above.

Both political parties agree that upgrades and expansions are necessary. Funding is the issue. The public sector, meaning municipalities and government have historically funded essential services. Due to ongoing budgetary constraints, there is a greater emphasis on using the private sector and public-private partnerships to finance these projects to support and sustain economic growth.

Repairs of existing infrastructure and new construction will be shaped by technology and innovation. Telephone poles are disappearing as we switch to cell phone towers. Liquefied natural gas facilities and natural gas pipelines are becoming more commonplace. Residents of storm prone areas like Southwest Florida are keenly aware of the advantages of underground versus above-ground utility networks. These changes lead to investments in new technology, projects, and systems.

As we wait for details on President Trump’s infrastructure spending plans, we do know that he’d like to spend $1 trillion on infrastructure. One element of his plan is the use of private firms and tax credits to attract financing outside of the government sector. Due to non-partisan support for essential services, the hope is that political agendas won’t affect this commitment to society. Some experts say that an aging infrastructure is a national security issue.

Bridges and roads are the biggest offenders when it comes to the CNBC top ten worst infrastructures. In order from worst to best they are; Rhode Island, New Hampshire, Maine, Connecticut, Hawaii, New Jersey, Maryland, New York, Massachusetts, and Vermont.

Water systems are also desperately in need of repair in addition to obvious transportation issues. Engineers, scientists, heavy-equipment manufacturers, contractors, laborers, businesses and consumers will also gain from any upgrades. Many of these projects take years to materialize from concept to completion providing short-term and long-term opportunities. Continuous and consistent demand for infrastructure improvement is a plus for investors as it may help to sidestep the ups and downs of the overall economy.

There are numerous opportunities to invest in infrastructure-related endeavors. How this could fit into your situation depends on knowing what you own and why you own it and having an investment plan in place. Working with a CERTIFIED FINANCIAL ADVISOR™ and reviewing your holdings may help to determine if this wide-ranging sector should be part of your plan.

As a final side note; Philadelphia is known for more than where the Constitution and the Declaration of Independence were signed in 1776 and 1787, respectively. Philadelphia is where the first privately operated toll road in the U.S. opened in 1795. Even more impressive is that the oldest surviving roadway bridge, the Frankford Avenue Bridge in Greater Philadelphia was built in 1697 and is still functioning today. Quality matters. Stay focused and plan accordingly.

Investing involves risk including the possible loss of capital. There is no assurance that any investment strategy will be successful. Asset allocation and diversification do not guarantee a profit nor protect against loss. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER ™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/ SIPC, 606 Bald Eagle Dr., Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.

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