Could toll roads potentially pay you?

Toll road “That will be $3.60 sir.” “Do you have change for a $5 bill?” “No sorry, exact change only.” “Oh ok, one sec.” I rummage around in the center console of my car to gather up a misfit collection of quarters, dimes, and nickels. I also do my best to straighten out two ragged $1 bills from my wallet. Putting it all together, I realize that my measly $2.80 won’t quite get me there. The entire time, I can feel the impatient eyes of commuters lined up behind me at the toll both burning into the back of my head. Feeling their exasperation, I hand over a crisp $5 bill. “Here you go, keep the change.” Let’s stop here. Imagine an alternate universe where, as you pull up to the window, instead of you paying the toll booth operator, they pay you! Now, of course, this alternate universe isn’t exactly how it works in the real world. But investing in toll roads and other infrastructure assets may be an attractive source of diversification and yield in a portfolio. The S&P Global Infrastructure Index is comprised of three sectors: Industrials, Utilities and Energy. Given the dramatic decline in energy prices, energy assets have garnered a lot of attention recently, in particular energy pipelines, which tend to be interest rate sensitive. But, infrastructure is more than just energy. For example, transportation assets—which include toll roads, railroads, air and sea ports—make up a meaningful portion of the industrials sector. These assets are generally less tied to interest rates and more tied to economic growth. Let’s focus on toll roads—roads that require drivers to pay a fee for use. Collecting tolls allows private investors, or governments, to recoup the investment costs of road construction and maintenance, while still allowing room for potential profit. Higher traffic volume can equate to higher revenues. Traffic volume tends to be positively correlated with a stronger economy (more goods and services are transported, new cars are purchased, and there is an uptick in leisure travel). Gas prices also influence traffic volume. When gas prices go down, people tend to drive more, all else equal. As a result, some drivers, often daily commuters, may opt to use less congested toll roads that provide faster and more predictable trip times, rather than the busier free roads. Some toll roads even come with the added benefit of inflation protection by tying toll rate increases to the level of inflation in the economy. All this is positive for an investor looking for income and a way to diversify their sources of return. Of course, infrastructue (which includes toll roads), carries some level of risk, including the potential loss of principal invested. Infrastructure-related investments have greater exposure to potential adverse economic, regulatory, political and other changes affecting such entities. They are also subject to various risks including governmental regulations, high interest costs associated with capital construction programs, costs associated with compliance and changes in environmental regulation, economic slowdown and surplus capacity, competition from other providers of services and other factors. That said, how do you invest in toll roads? Depending on where one lives in the U.S. toll roads are either familiar (e.g. New Jersey, Florida) or foreign (e.g. Oregon, California). Interestingly enough, there are no publicly listed toll road investments available in the U.S. As a result, to gain access to toll roads in your portfolio, infrastructure investors must look at non-U.S. markets where toll roads are more commonplace. We believe this is an area that is likely to grow, as functioning transportation is key to economic development, particularly in emerging economies.

The bottom line

Toll roads are an example of the diverse set of asset types that exist across the infrastructure asset class. Transportation assets as a whole tends to be less interest rate sensitive than other infrastructure sectors, and is instead more closely tied to underlying economic strength. Investing in toll roads, and other infrastructure assets, may be an attractive source of yield and diversification in a portfolio.