Infrastructure investing: the next ‘it’ sector?

Investors are always looking for the next big opportunity.

Even after so many lost so much betting on technology stocks, the search is still on for another great growth sector.

Could it be green-energy investing?

Or maybe it’ll be infrastructure investing.

There’s certainly a lot of talk with the upcoming 2012 presidential election about the need for the federal government to make significant investments in improving and repairing roads, airports, highways, mass transit and public buildings. The United States spends roughly $160 billion on highways each year, with about one-fourth of that coming from the federal government, according to the Congressional Budget Office.

Investment in infrastructure as an asset class has largely been limited to institutional and pension funds, or to investors with a significant sum of money. Increasingly, individual investors have been adding this asset class to their portfolios. However, if you’re eager to get into this area, tread carefully, regulators say.

“In any market cycle, there is an ‘it’ sector, a new exciting sector with growth potential,” said Gerri Walsh, vice president for investor education for the Financial Industry Regulatory Authority. “But sectors change over time, and you need to understand both the risks and rewards of the sector itself as well as the risks and rewards of the investment vehicle you are using to gain exposure to that sector.”

Last year, T. Rowe Price launched a global infrastructure fund that seeks long-term growth from investments in global companies involved in infrastructure and utility properties.

“We expect increased infrastructure spending over the long term around the world to offer significant, durable investment opportunities,” said Susanta Mazumdar, the fund’s portfolio manager. “The investable universe in this sector is expanding, as developing markets build out infrastructure and developed markets grapple with decaying infrastructure.”

In listing the risks and reward, the fund’s prospectus warns that it’s less diversified than a non-focused fund, and coupled with its potentially substantial reward is significant risk. In addition, any foreign holdings could be affected by declining local currencies or adverse political or economic events.

“Since the fund is not diversified and invests globally, it is appropriate only for investors who can tolerate substantial volatility,” the prospectus says.

Without commenting on a specific fund, Walsh said investors interested in this sector shouldn’t make the same mistakes that tech investors did during their irrational exuberance.

“The label is the thing that piques your interest, but an investor always needs to look under the hood to see what the investment is,” she said. “You still have to look at the fundamentals. Back in the days of the tech bubble, one of the biggest mistakes investors made was if someone said the word ‘tech,’ people thought it was going to be a success.”

There were many winners and losers when that investment bubble burst.

There’s lots of discussion around the world about creating infrastructure-related jobs as a way to stimulate economies. Countries will spend about $30 trillion over the next two decades on renovating and building new infrastructure, according to projections by CIBC World Markets, a wholly owned subsidiary of Canadian Imperial Bank of Commerce.

“Infrastructure is clearly emerging as a stand-alone asset class,” a CIBC report said. “And with massive injection of public and private money, this asset class will prove to be a profitable one.”

This may be true, but before investing in an infrastructure mutual fund, Walsh suggested asking the following questions:

-- What are the fund’s objectives?

-- What does it cost to own the fund?

-- What are the risks involved?

-- How much risk are you willing to take?

-- For companies engaged in building roads and bridges, to what extent are they relying on government contracts?

-- What’s the growth potential of the sector over time?

Don’t get so enamored with the growth estimates that you forget to do your homework, Walsh said.

Before you invest, be sure to read the mutual fund’s prospectus so that you’re clear about its investment strategy and the potential risks. In the fund’s primary selling document, you’ll find key information about its investment objectives, strategies for achieving those goals and potential risks. Pay attention to the fees and expenses.

Most importantly, no matter how much growth is predicted in this investment area, make sure you’re not putting all your resources into this one asset class or an infrastructure-related stock.

Whether infrastructure investing is the next “it” sector, remember that diversification is still the stalwart of investing.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Questions are welcomed, but because of the volume of mail, personal responses may not be possible.

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.”
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