An alternative asset class you may take for granted | ETF Trends

This article was written by Darin Turner, a portfolio manager and member of the Real Estate Securities Portfolio Management and Research team with Invesco Real Estates.

This two‐part series examines the expanding capital requirements for infrastructure globally as developed markets confront ongoing replacement needs, and the urbanization of emerging markets places additional stress on the existing foundation. This second part explores what this macro trend may mean for investors. The first part: Bridging the gap in global infrastructure funding.

Infrastructure is an integral part of your daily life — you drive on it, depend on it for electricity and water, and use it to communicate on your cell phone. But have you considered investing in it? Infrastructure investment can offer several potential benefits to an overall portfolio.

Established track record

Infrastructure comprises long-lived assets in industries with high barriers to entry, typically supported by resilient demand for essential services. While “infrastructure as asset class” is a comparatively new concept in the US, it has an established track record in other countries. In the UK, Canada and Australia, infrastructure has been considered its own asset class for some time. Consider two successful examples:

  • England and Wales privatized their water assets in 1989 by selling 10 publicly owned water companies and launching a new regulator. Nearly a decade later, The World Bank Group summarized the results: “These reforms have delivered an impressive volume of new investment, full compliance with the world’s most stringent drinking water standards, a higher quality of river water, and a more transparent water pricing system.”1
  • In Australia, many toll roads, ports and airports are privatized. A study conducted by the Allen Consulting Group and the University of Melbourne found that infrastructure built through public-private partnerships tended to have fewer cost and time overruns when compared with traditional public-only projects.2

Dynamic, growing asset class

Over the past 10 years, total net assets in Lipper’s Global Infrastructure Funds Category have swelled from below $150 million to over $15 billion currently.3 Overall investor interest in infrastructure could continue to grow for several reasons, including:

  • The possibility for increased securitization of infrastructure assets resulting from the pervasive public funding gap confronting many nations today.
  • The current shift toward including alternative investments, such as real estate and infrastructure, in traditional stock/bond portfolios.
  • Investors’ search for alternative sources of yield and diversification in a low interest rate environment.

Benefits for investors

Global infrastructure has historically provided competitive total returns relative to broad markets. For the 10 years ended June 30, 2015, the Dow Jones Brookfield Global Infrastructure Index returned 10.4% in average annual returns versus the MSCI World Index return of 6.4%.4 Equally compelling, a significant portion of infrastructure returns comes from recurring income. The current dividend yield on the Dow Jones Brookfield Global Infrastructure Index is 3.7% versus 2.5% for the MSCI World Index.5

Moreover, the contractual nature of infrastructure cash flows tends to both enhance their predictability and lower financial risk, thus potentially boosting the risk-adjusted performance of the asset class. Global infrastructure has experienced 13% annual dividend growth in the years following the Great Recession, compared with 3% and 1% annual dividend growth for global stocks and global real estate, respectively.6 The path of dividend growth is important as well. As the chart below shows, infrastructure has experienced annual consecutive growth since 2008 — even in 2009, when dividends on both global stocks and global real estate shrank.

Infrastructure has experienced annual dividend growth since the Great Recession

Finally, Infrastructure has provided inflation-hedging and diversification characteristics historically. In a review of inflationary periods — defined as the US consumer price index above 2.5% — US infrastructure stocks outperformed US stocks by 6.5% annualized.7 Additionally, correlation of global infrastructure relative to US fixed income is low at 0.27.8

I believe these potential benefits make a compelling case for considering an investment in the infrastructure that you likely take for granted every day.

Read the first part of Investing in infrastructure: Bridging the gap in global infrastructure funding

1 Source: The World Bank Group, Public Policy for the Private Sector, “Water Privatization and Regulation in

England and Wales, May 1997

2 Source: Infrastructure Partnerships Australia, “Performance of PPPs and Traditional Procurement in Australia,” November 2007

3 Source: Lipper, as of June 30, 2015

4 Source: Invesco Real Estate, Zephyr StyleADVISOR, as of June 30, 2015

5 Source: Bloomberg L.P., as of June 30, 2015

6 Source: Invesco Real Estate, Bloomberg L.P., as of December 31, 2014