Brick-and-mortar investments coming back into vogue
Perhaps it’s a sure sign of broad economic recovery, or maybe it’sthat longer term thinking is, if only momentarily, trumping theshort-term perspective that usually dominates investing.
Perhaps it’s a sure sign of broad economic recovery, or maybe it’s that longer term thinking is, if only momentarily, trumping the short-term perspective that usually dominates investing.
Whatever the reason, boring bricks-and-mortar type investments have become alluring. Earlier this month, Warren Buffett of Berkshire Hathaway made his “all-in wager on the economic future of the United States” by spending US$44 billion to buy the 77 per cent of Burlington Northern Santa Fe that he didn’t already own. The railroad buy is the largest single acquisition in Berkshire Hathaway’s history.
Major Canadian investors are also making big bets in primary industries and infrastructure. In September, Regina-based Viterra Inc. jumped into the front ranks of global grain handlers by completing a four-month, $1.5-billion takeover of Australia’s ABB Grain Ltd. Also in September, Ontario Teachers’ Pension Plan Board picked up a 35.5 per cent share of Bristol International Airport.
More recently, we’ve seen the CPP Investment Board teaming up with Teachers to buy an Australian toll road operator, Transurban Group. CPP Investment Board is also partnering with a private U.S. fund, TPG Capital, in a $5.2-billion takeover of U.S.-based IMS Health, a company providing market intelligence to the pharmaceutical and health-care industries.
There are several reasons why such straightforward investments are desirable, starting with the fact they’re readily understandable and have track records, unlike many technology plays.
Fundamental businesses like railroads and health care reflect long-term economic trends — the cost-efficient, even “green,” movement of goods in a growing economy in the case of railroads, and the provision of services to a growing older population in the instance of health care.
Infrastructure also has charms. Toll roads, airports, power generation and transmission and ports typically operate in stable regulatory environments and tend to provide steady, inflation-adjusted returns over long periods.
Pension investors like the CPP Investment Board have long had a soft spot for infrastructure investments. By necessity, pension funds have an eye to what their liabilities are going to look like a couple of decades from now, so buying and holding reliable cash generators like airports and roads is helpful.
But even investors with shorter time horizons can benefit from a mix of basic businesses and infrastructure that ensure participation in economic upturns while helping to moderate downturns. Water and sewage companies or roads and tunnels may not be glamorous, but unlike tech darlings or trendy retailers, they’ll deliver investment returns year after year.