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Building a Resilient Portfolio: Why Infrastructure is Essential

In baseball, we tend to cheer loudly for the big-time hitters who hit home runs and grand slams. But the real top performers on the team could be the players who get base hits and runs batted in (RBIs). Consistency wins ball games. The same could be said for building a portfolio. Reducing volatility and getting steady ‘wins’’ allows portfolios to grow in any environment.

That sums up the case for investing in global infrastructure.

Owning toll roads, airports, pipelines, server farms, and other critical needs has long been used by pension funds, institutional investors, and endowments to smooth out returns, create cash flow, and avoid the gyrations of stocks. And it turns out, it works wonders for retail investors as well. In the end, when allocating assets in a portfolio, infrastructure is where it is at.

Essential to Modern Society

Infrastructure could be defined as physical structures or essential services that facilitate modern society’s orderly operation. Typically, we think of infrastructure assets as transportation-based, such as airports, toll roads, ports, and bridges; energy-focused, such as powerlines, pipelines, and solar farms; communications facilities, such as cell phone towers, server farms, and satellite dishes; as well other items such as wastewater treatment, warehouses, and even healthcare facilities.

Without these facilities and structures, modern society would have trouble functioning.

Historically, these items have been owned by governments. However, thanks to budget deficits and a focus on privatization, investors have gotten in on the act. Starting in the 1990s—pioneered by Yale’s David Swenson—infrastructure has become an asset class all unto itself.

According to alternative asset data provider Preqin, by the end of 2023, infrastructure assets under management reached an estimated $1.1 trillion. That’s about a 16% annual compound growth rate since 2010. 2

Steady Returns

There’s a reason why private investors have gotten in on the infrastructure act. Trillions of dollars have been invested in fact. After decades of underinvestment, our world’s essential facilities are lacking in capability, while the so-called Ds of digitalization, decarbonization, and deglobalization are driving change. Growing populations in the emerging world and repairing old infrastructure assets in the developed world require billions in spending.

Analysts have suggested that the world has entered a new supercycle of infrastructure spending, requiring roughly $200 trillion in needed funds over the next 30 years. That’s a huge opportunity for private players, including individuals, pension funds, endowments, and other asset managers. 1

Aside from the growing investment opportunity, portfolios gain some very valuable wins by adding infrastructure.

This includes lowering the volatility of a portfolio. That’s due to the base hit analogy mentioned in the intro. As an asset class, infrastructure is cash-flow based. When a customer uses a toll road or when an energy company sends natural gas through a pipeline, it pays a fee. This provides a steady base of cash for the owner, creating a steady return profile. With it, you’re not seeing big surges in returns in either direction. It’s a stable income generation. By getting 5% to 7% per year consistently, the asset class delivers strong absolute returns to a portfolio. For example, this chart from asset manager Brookfield shows that by adding a dose of private infrastructure to a portfolio, investors can reduce their overall risks—due to lower volatility—while increasing their overall returns.



Source: Brookfield

The consistency of returns plays out in the asset class’s ability to have lower drawdowns if any at all during market stress. Looking at the 10 worst quarters over the last decade, stocks during those periods averaged an 8.13% loss. Even the stability of bonds was tested, losing 1.72% on average. However, the steady cash returns of infrastructure allowed the asset class to still post a positive 1.39% return during those quarters.

Infrastructure is one of the few asset classes that can also provide a real inflation hedge. Contracts for pipelines, toll roads, and telecommunications towers are often tied to rates of inflation, while regulated assets often come with pre-approved yearly rate hikes. So, as inflation increases, so does the cash flow these assets throw off.

Then there are taxes to consider. Thanks to new government programs such as the $1.2 trillion Infrastructure Investment and Jobs Act, Japan’s Green Transformation Act, and the EU’s Green Deal, many infrastructure projects now come with subsidies and tax savings. This makes their cash flows even better as investors can potentially reduce their tax outlays while supporting the asset class.

Building an Infrastructure Portfolio

Given the potential of infrastructure to provide steady returns in a model portfolio, it makes a ton of sense to add the asset class. There are a few things to remember. Building a toll road or transmission lines and owning them are two different sides of the same coin. The build-out aspect isn’t the same as collecting cash flows and won’t generate the same kind of returns. For the purpose of this article and the benefits of the asset class, investors need to focus on the ownership of the assets.

For those high-net-worth investors, many investment banks and asset managers have private equity or non-traded funds that invest directly into infrastructure assets. Using these can give you a direct window into all the benefits.

For the rest of us, we need to use public firms that own or funds that invest in companies that own these assets. Thanks to the surge in interest since the late 1990s, there are plenty of choices.

Running screener can uncover top firms like Brookfield Infrastructure Partners (BIP) or Grupo Aeroporto del Pacífico, S.A.B. de C.V. (PAC). But given the sheer size and number of players, it may make sense to go with a fund or ETF.

Infrastructure ETFs & Mutual Funds

These funds were selected based on their low-cost exposure to the infrastructure industry. They are sorted by their YTD total returns, which range from 0.05% to 6.6%. They have expense ratios between 0.30% to 1.23% and assets under management between $45M to $8.77B. They are currently yielding between 1% and 4.2%.

In the end, infrastructure is a unique and wonderful asset class. The ability to generate steady, cash-heavy returns is invaluable to a portfolio. Investors are able to reduce their risks and generate higher long-term returns by investing in toll roads, bridges, and other essentials. Thanks to the growth of the asset class, there are plenty of ways to add infrastructure to a portfolio.

The Bottom Line

Infrastructure investing offers plenty of benefits to a portfolio, from lowering volatility and inflation-fighting to strong cash-based returns. For investors building out a portfolio or looking to lower their volatility, the asset class can’t be beaten. And thanks to plenty of growth potential, the opportunities for investing are just beginning.

1 Brookfield (June 2024). Why Infrastructure Is a Compelling Investment for All Cycles

2 Reuters (February 2024). Infrastructure may take toll on big asset managers