Babson says that several of his peer funds use a fairly liberal definition of infrastructure, and that his is “pure play.” It includes companies that own and operate airports, toll roads and seaports, and does not invest in airlines, shipping firms or global logistics companies, as others do.

“Our first order consideration,” says Babson, “is why the client has an allocation to infrastructure, and what role the asset class plays at the total portfolio level.” Investors turn to the class for diversification, downside protection and relatively attractive yield, he says, and pure plays can offer this because they tend to be highly regulated. Also, thanks to long-term contracts, they often provide steady, reliable cash flows that aren’t hurt by market downturns.
“If you cast the net too wide,” he says, “the unique attributes of the asset class start to get diluted.” His strategy also offers a lower beta—the measure of volatility against the rest of the equity world.

The four subadvisors in the Russell Global Infrastructure Fund have global investment mandates. The fund tends to hold more in emerging markets than its benchmark does, but it also invests in developed markets in many regions.

Babson declined to discuss specific fund holdings, but shared some sector and geographic trends Russell is following. It sees transportation-related opportunities in China, which is building new highways and rail networks, and in Latin America. The latter, he says, is “experiencing an evolution in improving energy delivery.” In India, there is an enormous need for improved water infrastructure, as many parts of the country still do not have reliable access to potable water.

Of course, investing in infrastructure has its risks. “Regulatory risk is something all disciplined investors pay a lot of attention to,” says Babson, who notes this can be more of an issue in emerging markets. He is also very conscious of interest rate risk. In a rising rate environment, he feels it may make sense to be underweight in pipelines and regulated utilities. However, airports and toll roads are geared more to a global recovery and are less interest-rate sensitive, he says.