Characteristics of infrastructure assets
Infrastructure assets are becoming more familiar to investors and are being used increasingly as part of a global asset allocation. This is due in large measure to the compelling characteristics of the infrastructure assets themselves:
Monopolistic - Infrastructure components typically demand large-scale investments with very high fixed costs, creating high barriers to entry and monopolistic or quasi-monopolistic characteristics. Geography also tends to limit the proliferation of competing infrastructure projects.
Inelastic demand - Since the physical assets and services that make up infrastructure are necessities; demand does not fluctuate with price changes. Relatively inelastic demand makes infrastructure less sensitive to business cycles.
Stable cash flows - Long-term contracts between governments and private managers promote steady cash flows generated by fees or tolls on underlying assets. Concessions granted by governments to private entities to manage infrastructure assets can last up to 99 years.
Inflation hedge - As replacement costs of physical assets increase in an inflationary environment, they protect the value of infrastructure investments. Moreover, fees for the use of infrastructure are frequently linked to inflation through a regulated return framework or a contractually specified rate of return.
Durability - Infrastructure assets often last more than 50 years, with little or no risk of redundancy or technological obsolescence.
Given these characteristics, infrastructure can be considered a distinct asset class, with potentially more stable income-oriented returns that are not highly correlated with those of other major asset classes.
Historically, institutional investors have preferred direct or unlisted infrastructure investments in this asset class. However, listed global infrastructure has provided an investment opportunity for a wide range of investor types and may provide benefits such as:
- Broad diversification by country, sector, and holding
- Asset liquidity that facilitates portfolio rebalancing
- Temporary market mispricings that the active portfolio manager can seek to exploit
- Access to many high-quality infrastructure assets (airports, seaports, and public transportation systems).
Listed infrastructure tends to have little overlap with broader global equity indices and can help provide greater diversification in a broader portfolio. The stability of cash flows, inelastic supply/demand characteristics, and the essential service nature of underlying assets typically result in the asset class providing defensive characteristics during periods of economic instability. This is quite apparent when viewing the upside and downside capture of the asset class which exhibits solid upside participation with much lower downside capture.*
S&P Global Infrastructure Index up / down capture vs. indices Dec. 1, 2021 – Dec. 30, 2022
Also, listed infrastructure has historically provided strong returns during inflationary periods given its underlying inflation hedging characteristics.**
For these reasons, listed infrastructure provides inherent value and makes an attractive investment in a diversified portfolio.
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