Not Your Parents' Infrastructure

December 6, 2021 | By: Bill DeRoche, Mark Stacey and Grant Wang

Not Your Parents’ Infrastructure

The new wave of “infra” stocks presents new opportunities for investors.

There is no question that infrastructure investing is on the verge of something big – especially following passage in November of the United States’ massive US$1.2-trillion spending plan to fortify the structures and networks that underpin the world’s largest economy. In fact, to hear President Joe Biden describe it, the new legislation is a “once-in-a-lifetime investment” that will rival anything built in the country since the interstate highway system in the 1950s.

But the sheer size of the opportunity at hand isn’t the only aspect worth noting. What should stand out to investors just as much is how this pledge – and others from around the world – differ in scope from most large infrastructure initiatives of the past. While governments are still allocating a good chunk of the money to the repair and expansion of traditional infrastructure like roads, bridges, railways, ports and airports, they are also earmarking a significant amount for “new wave” projects to facilitate economic activity that is becoming increasingly digital in nature and carries the promise of being more sustainable, too.

For instance, as part of its new plan, the Biden administration says it will spend US$65 billion to build reliable high-speed internet through broadband infrastructure and US$75 billion to upgrade power infrastructure and move from fossil fuels to renewable energy. At the same time, another US$15 billion is to be spent on electric vehicles and the infrastructure needed to charge them.

While it remains to be seen how quickly these commitments will be tapped, or how they ultimately end up flowing through to financial markets, perhaps the most important question for investors is how best to navigate the growing universe of infrastructure possibilities at hand. From our perspective, a good starting point is to group the newer wave of opportunity into two broad investment categories, each of which can be broken down into sub-categories.
New Wave of Infrastructure
Source: AGF Investments Inc. as of February 15, 2021
New Wave of Infrastructure
Source: AGF Investments Inc. as of 02/15/2021

Digital infrastructure, the first of these categories includes three related niches: telecommunication towers, data centres and cloud services. Of the first, the business of building and maintaining cell towers and renting them out to the world’s largest telecom providers may not be fully appreciated by investors just yet, but this type of B2B relationship is now commonplace in most of North America and Europe, where it has spawned several real estate investment trusts (REITs) with billions of dollars in revenue and market capitalizations to match.

Moreover, a growing number of REITs and companies are also focused on owning or leasing real estate space for use as data centres. Typically, these agreements include additional revenue-generating services such as power supply and cooling systems, and they encompass a diverse range of customers, from telecom, media and internet service providers to government and various other private enterprises.

Cloud services, meanwhile, make up one of the biggest operational trends of recent years. Many companies are moving away from “on-the-premises” servers towards database hosting and cloud computing services sold and maintained by some of the world’s best known tech giants. Those companies, in turn, have experienced a marked increase in total revenues generated from these services as a percentage of overall sales.

The second broad investment category in the new wave is best classified as renewable energy infrastructure. In large part, this is an adjunct to more traditional energy infrastructure and includes two subcategories, the first of which is renewable energy utilities that sell an increasing amount of power to consumers and businesses generated by multisource energy platforms, including hydroelectric, wind and solar facilities.

As for renewable energy equipment, the second of these two subcategories, it’s clear that makers of solar panels, wind turbines, hydrogen cells and other components used to harness renewable energy have increased dramatically in recent years. Indeed, according to the most recent statistics from Global Wind Energy Council, 93 gigawatts of wind energy capacity were installed globally in 2020, representing a 53% increase from installations in 2019.

Of course, this new wave may end up extending well beyond these two categories in time. Green infrastructure services, for example, is a burgeoning classification that includes its own set of potential opportunities, such as electric vehicle battery manufacturers.

Still, categorization may only be half the battle. Whether it’s a more traditional asset like an airport or one more modern like a cell tower, it is widely understood that infrastructure as an investment theme is defined by certain criteria. For instance, most “infra” stocks tend to generate a stable cash flow from some essential product or service with a social benefit. In addition, they often involve the use of capital-intensive real assets and are considered high-barrier-to-entry businesses that have minimal competition.

To that end, both digital and renewable energy infra stocks seem to fit the bill as the underlying trends in support of them have also accelerated. For example, digital infrastructure is a direct beneficiary of the ongoing rollout of fifth-generation (5G) cellular networks that will be critical to bringing new technologies, such as the Internet of Things and autonomous vehicles, to market. At the same time, the global pandemic’s impact on digital infra stocks cannot be understated. In particular, shelter-in-place regulations have led to a significant increase in the use of online services and, perhaps, have forever changed the way people work and socialize with one another.

Similarly, the performance of renewable energy infrastructure stocks has largely been tied to growing public awareness about climate change and ambitious political commitments such as the Paris Climate Agreement, which seeks to limit the global average temperature increase to 1.5°C by 2050 through the reduction of greenhouse gas emissions. In turn, renewables are expected to surpass coal as the largest source of electricity generation in the world by 2025, according to the International Energy Agency.

If anything, then, infrastructure is a growing potential opportunity for investors, not just in size but in scope as well. And while traditional assets like roads, bridges and pipelines are still central to the theme, it may be the new wave of cell towers, wind farms and data centres that will keep infrastructure portfolios on a more solid footing in the future.

Bill DeRoche
Bill DeRoche, MBA, CFA®
Chief Investment Officer and Head of AGFiQ Alternative Strategies
AGF Investments LLC
Mark Stacey
Mark Stacey, MBA, CFA®
Senior Vice-President, Co-CIO AGFiQ Quantitative Investing, Head of Portfolio Management
AGF Investments Inc.
Grant Wang
Grant Wang, M.A. (Econ.), Ph.D., CFA®
Senior Vice-President, Co-CIO AGFiQ Quantitative Investing, Head of Research
AGF Investments Inc.
Chief Investment Officer and Head of AGFiQ Alternative Strategies

Bill DeRoche is Chief Investment Officer, AGF Investments LLC (formerly FFCM LLC)¹, and Head of AGFiQ Alternative Strategies. Bill is co-founder of AGF Investments LLC, a Boston-based investor advisory firm founded in 2009 and subsidiary of AGF Management Limited. He is a leader of AGF’s quantitative investment platform, known as AGFiQ. AGFiQ’s team approach is grounded in the belief that investment outcomes can be improved by assessing and targeting the factors that drive market returns.

Bill has long-tenured expertise employing quantitative factor-based strategies and alternative approaches to achieve a spectrum of investment objectives. Previously, Bill was a Vice-President at State Street Global Advisors (SSgA), serving as head of the firm’s U.S. Enhanced Equities team. His focus was on managing long-only and 130/30 U.S. strategies, as well as providing research on SSgA’s stock-ranking models and portfolio construction techniques. Prior to joining SSgA in 2003, Bill was a Quantitative Analyst and Portfolio Manager at Putnam Investments. Bill has been working in the investment management field since 1995. Prior to 1995, Bill was a Naval Aviator flying the Grumman A-6 Intruder as a member of Attack Squadron Eighty-Five aboard the USS America (CV-66).

Bill holds a Bachelor’s degree in Electrical Engineering from the United States Naval Academy and an MBA from the Amos Tuck School of Business Administration at Dartmouth College. He is a CFA® charterholder and holds FINRA licenses 7, 63 and 24.

¹ An investment professional with AGF Investments LLC (formerly FFCM LLC), a U.S.-registered investment advisor firm and affiliate of AGF Investments Inc.

Senior Vice-President, Co-CIO AGFiQ Quantitative Investing, Head of Portfolio Management

Mark Stacey is Senior Vice-President and Co-CIO AGFiQ Quantitative Investing, Head of Portfolio Management at AGF Investments Inc. (AGF). Mark leads the firm’s investment management functions for AGF’s quantitative investment platform, AGFiQ. AGFiQ’s team approach is grounded in the belief that investment outcomes can be improved by assessing and targeting the factors that drive market returns. In addition, Mark is a member of the Office of the CIO – a leadership structure within AGF’s Investment Management Team that encourages and further embeds collaboration and active accountability across the team and broader organization.

He began his career with AGF as part of the Highstreet* Investment Management team and has been in the industry since 2002 applying quantitative and qualitative management techniques to the portfolio management process. He previously served as a Portfolio Manager with a major life insurance company.

He earned an MBA from the Richard Ivey School of Business, an MIR from the University of Toronto and is a CFA® charterholder.

*Highstreet Asset Management Inc. is a wholly-owned subsidiary of AGF Investments Inc.

Senior Vice-President, Co-CIO AGFiQ Quantitative Investing, Head of Research

Grant Wang is Senior Vice-President and Co-CIO AGFiQ Quantitative Investing, Head of Research at AGF Investments Inc. (AGF). Grant helps lead AGF’s quantitative investment platform, AGFiQ, by developing, enhancing and managing quantitative investment strategies, and serves as Head of Research. AGFiQ’s team approach is grounded in the belief that investment outcomes can be improved by assessing and targeting the factors that drive market returns.

He began his career with AGF as part of the *Highstreet Investment Management team. Prior to joining AGF, Grant spent seven years as a lead quantitative researcher for one of Canada's largest pension funds. He has been involved with utilizing big data and developing predictive statistical models for the financial industry since 2001.

Grant has a B.A. and M.A. in Economics from Nankai University, and a Ph.D. in Economics from the University of Western Ontario. He is a CFA® charterholder.

*Highstreet Asset Management Inc. is a wholly-owned subsidiary of AGF Investments Inc.

The commentaries contained herein are provided as a general source of information based on information available as of December 6, 2021 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.

The views expressed in this document are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

References to specific securities are presented to illustrate the application of our investment philosophy only and do not represent all of the securities purchased, sold or recommended for the portfolio. It should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by AGF Investments.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

This document is for use by Canadian accredited investors, European professional investors, U.S. qualified investors or for advisors to support the assessment of investment suitability for investors.

® The “AGF” logo is a registered trademark of AGF Management Limited and used under licence.

RO:1927660

Our website uses cookies to help you get the best experience. Please accept or click to edit your settings.