Rebuilding Asset Allocations by Investing in US Infrastructure

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From the Erie and Panama canals to the Transcontinental Railroad in the 19th century to the Interstate Highway system and the DARPA projects that created the internet in the 20th, public infrastructure projects have played a central role in the United States’ growth.

Over the past quarter-century, however, funding for maintaining and expanding US infrastructure has remained flat or fallen as a share of budgets in many of the jurisdictions that own and manage the country’s roads, bridges, water systems, hospitals and other essential public services. Meanwhile the demands placed on this infrastructure by the US’s population and GDP growth have kept increasing to the point that the US needs to spend an estimated $3.6 trillion through 2020 to remedy deficiencies in its infrastructure.

President Donald Trump has repeatedly touted his plan to rebuild the nation’s neglected infrastructure. But while the White House seeks an expanded federal role in incentivizing projects, his proposals are only intended to supplement the central role played by the municipal bond market. US states and municipalities already fund three-quarters of public spending on transportation and water infrastructure, largely by issuing bonds. The US municipal bond market has existed for more than 200 years and currently has $3.8 trillion in bonds outstanding. It is a developed but inefficient market for high-quality liquid assets which offers the potential for experienced active managers to capture excess yield. In addition to potential yields that compare favorably with more familiar forms of sovereign debt, these bonds offer global investors portfolio diversification, stable credit quality and relatively low volatility and we expect annual issuance of more than $450 billion.

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