One of the key benefits of diversification is to enable investors to remain invested during periods of heightened uncertainty. This is particularly important when central expectations are not met, and/or when the performance of broad global equity indices faces challenges.
Evolving diversification
Stable cashflow qualities provide assets with longer-duration characteristics. As a result, infrastructure has demonstrated some diversifying properties and resilience during periods when broader equity markets have struggled.
Chart 1 demonstrates this by showing the performance of various indices against changes in bond yields. While past performance is not always a guide to future results, history suggests that infrastructure performs relatively well compared with other assets during periods when bond yields fall. This is because stable, regulated infrastructure cashflows can be discounted long into the future. Although infrastructure performance has historically been less favorable compared with other asset classes in months when yields rise, it has still provided a level of return.
Chart 1. Asset class returns in rising/falling bond markets
Source: Morningstar*. Rising/falling bond markets represented by the performance of US 10 year yields. The respective indices are; FTSE All Share total return (tr)**, ICE BofA Global High Yield tr Hedged GBP, MSCI All Country World Index GBP, and MSCI World Infrastructure tr GBP***. Monthly data from March 2003 to October 2023. Past performance is not a guide to future results.
Return expectations
Diversification is important but not if it comes at undue cost to returns. Buying insurance will hedge risk, but at the cost of a regular premium. We believe it is better to improve diversification while seeking to enhance, or at least not unduly degrade, returns.
Population growth, rural-to-urban migration, and the reshoring of supply chains are just some of the dynamics contributing to demand. In a 2021 study, the American Society of Civil Engineers estimated that in the US, $2.6 trillion of investment is required to bring current US Infrastructure up to an acceptable standard.1
Popular with private equity
Private equity investors recently demonstrated significant interest in infrastructure investment. Brookfield Investment Partners achieved its largest ever fund-raising at £28 billion specifically for infrastructure assets, while BlackRock recently bought Global Infrastructure Partners for $12.5 billion.2 Commenting on these transformational purchases, BlackRock’s founder and CEO Larry Fink summed up his bullish view of infrastructure investments by saying:
“Infrastructure is one of the most exciting long-term investment opportunities, as a number of structural shifts reshape the global economy. We believe the expansion of both physical and digital infrastructure will continue to accelerate, as governments prioritize self-sufficiency and security through increased domestic industrial capacity, energy independence, and onshoring or nearshoring of critical sectors. Policymakers are only just beginning to implement once-in-a-generation financial incentives for new infrastructure technologies and projects.”3
Climate considerations
Climate transition, adaption, and mitigation will also require considerable investment in both existing and new infrastructure projects. PwC estimates that the UK will require £400 billion of additional infrastructure investment between now and 2050 in order to hit Net-Zero climate pledges.4 Britain needs to increase new electricity grid infrastructure by a factor of seven in order to meet both Labour and Conservative pledges.5
In the US, the bipartisan Infrastructure Investment and Jobs Act as well as the Inflation Reduction Act provide $190 billion and $370 billion of tax credits for investment in infrastructure and renewable energy projects. Increasingly, given the current unfortunate geopolitical outlook, such infrastructure and energy policies are becoming central to energy security as well as the climate transition.
Final thoughts
We believe that infrastructure, according to our definition, helps improve the diversification of portfolios without unduly affecting expected returns. The global outlook for infrastructure investments remains buoyant, with the combination of basic requirements, energy security and the climate transition providing significant demand for investment.
1 Infrastructure Investment Gap 2020–2029. "Assessing America’s Infrastructure Gap." ASCE, January 2022. https://infrastructurereportcard.org/resources/investment-gap-2020-2029/.
2 ft.com, December 2023.
3 BlackRock, January 12, 2024.
4 PwC, November 2020.
5 The Economist, January 2024.
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