Infrastructure continues to be a significant allocation within all our portfolios.

As an asset class, it provides a steady income stream which has inflation protection built into the underlying projects and assets as well as having a low beta to equities and bonds. 

What are the reasons for investing in infrastructure?

Firstly, there is a need for large amounts of spending, not just in emerging economies, but also many developed nations. Trillions of dollars’ worth of investment is required to reach current emission targets. Many countries are implementing these targets, which shows how important cleaner infrastructure will continue to be. 

Infrastructure spending is very long term in nature and can provide access to positive economic growth for governments. Due to the length of infrastructure contracts, the risks to investors from an income and capital perspective are reduced. 

Finally, the income generated from infrastructure as an asset class is stable and can provide inflation protection. This is key as inflation continues to provide a major headwind in many economies. For lower risk investments, having inflation protection is something that is hugely important to create a positive total return. 

Which infrastructure assets do we prefer? 

There are many different types of infrastructure assets to invest into. Each have their own risk and opportunities. The underlying assets and projects that our chosen infrastructure funds invest into, fall under two main categories; regulated and contracted utilities or user pay assets, both of which can be classed as listed infrastructure assets. Listed infrastructure assets provide greater liquidity for investors over time. 

• Regulated and contracted utilities include, water, electricity gas and renewables. These assets provide a known, steady income and have inflation protection built into the pricing structure. These assets generally have a stable cash flow and the demand is constant. 


• User pay assets are more growth focused and have a greater correlation to underlying economic growth. These assets move people, goods, and services throughout economies. As economies grow and develop, demand for these assets increase. Pricing is set by long term contracts as well as volume, so revenue is determined by how many people use the assets. Coming out of COVID, as economies looked to reopen, there was a greater focus on user pay assets as the global economic outlook improved. This provided good underlying income and capital growth for investors. However, as economies looked like they were slowing and inflation would be more persistent, there was a move towards investing more in regulated utilities. This is due to the more defensive nature of these assets, greater inflation protection and steady user demand.

What about the future? 

The team believe that the positive return profile from infrastructure can continue. There are four main themes driving this opportunity: 

1. Decarbonisation – reducing carbon intensity in a particular area of activity. This may be driven by regulatory thresholds, companies adopting corporate policy of their own accord, and lenders and shareholders influencing corporate activity. Companies who enable a greener world should benefit. 


2. Global utilities – These are the world leaders in clean energy. They are currently on positive valuations and continue to simplify their portfolios to focus on the future. These utility names are key to meet decarbonisation levels. 


3. Recovery – Post COVID, economic recovery has stuttered and so there is still a long way to go as mobility continues to move back to pre-pandemic levels. User pay assets will continue to benefit from this. 


4. 5G revolution – Significant capital expenditure is required to meet the global 5G requirements. Tower companies are a main beneficiary of this. 5G will then likely progress into 6G and so on, so there is a continuing investment case within this area. 


In conclusion 

Even though the performance of infrastructure has been positive over the past couple of years, we believe the investment backdrop for the asset class is still encouraging for the future. Governments will continue to put in plans for increased infrastructure spending as has been the case for the past few years. All nations understand how important it is to drive economic growth and meet climate targets at the same time. Infrastructure investment is key to do this and so will continue to be a significant allocation within our portfolios over time.