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Infrastructure is Holding Its Own: The Rise of the Infrastructure Asset Class
By: Luba Nikulina, IFM Investors
IFM Investors' Chief Strategy Officer Luba Nikulina looks at how infrastructure is gaining recognition as a foundational asset class as important as equities and bonds, aimed at securing diversified, less volatile, low correlation long-term returns for investors.
This is an excerpt from NCPERS Spring 2024 issue of PERSist, originally published April 25, 2024.IFM Investors' Chief Strategy Officer Luba Nikulina looks at how infrastructure is gaining recognition as a foundational asset class as important as equities and bonds, aimed at securing diversified, less volatile, low correlation long-term returns for investors.
Disclosures: This article is provided for informational purposes only. It does not constitute an investment recommendation, offer or solicitation and should not be relied upon as investment advice or as the basis for any contract or commitment. This information does not constitute investment, legal, accounting, regulatory, taxation or other advice. IFM Investors Pty Ltd (“IFM Investors”) recommends that before making an investment decision, each prospective investor should consult a financial advisor and should consider whether any investments are appropriate considering their particular investment needs, objectives, and financial circumstances. Tax treatment depends on each prospective investor's individual circumstances and may be subject to change in the future. This information should not be reproduced without the written consent of IFM Investors.
For decades, governments have been eager to attract private capital – and especially pension capital – to help fund the infrastructure spend their communities need. Well-established as a standalone asset class in Australia and Canada, infrastructure has become a mainstay of pension portfolios in both countries due to its ability to act as a natural inflation hedge and its lack of correlation with returns generated by listed equity and debt, which for decades were the foundational asset classes for any portfolio. But as interest in infrastructure increases across the globe, the time has come to consider it as equally vital to the performance of institutional investors' portfolios as those more traditional asset classes.
Establishing infrastructure
With a track record spanning more than two decades, we can now conclusively say that the risks taken on by, and returns enjoyed from, infrastructure are significantly differentiated from any of the other asset classes that may sit within the private markets or alternatives sectors, meaning that infrastructure has truly come into its own as a standalone asset class.
Unlike equities and bonds, unlisted infrastructure's underlying return streams are highly linked to regulatory or contractual frameworks, associated with the nature of these assets as providers of essential community services. As witnessed over the last couple of years of pandemic, war, and inflation, this means that the asset class can often continue to perform in such difficult economic climates, even where the macroeconomic environment will impact the returns of other mainstay assets. We therefore believe the infrastructure asset class has a role to play as a foundational portfolio asset class aimed at securing diversified, less volatile, low correlation long-term returns.
Expanding infrastructure opportunities
U.S. pension investors, and those wishing to grow their exposure to the U.S., will see an increase in infrastructure opportunities in coming years as the impact of the Inflation Reduction Act is fully felt. Half of the Act's $739bn in funding is allocated to clean energy and climate investments, resulting in a significant boost to renewable energy and energy security infrastructure, such as solar power and battery storage, and substantially invigorating a sector that has already become - and is likely to continue to be - the single-biggest growth opportunity in coming years.
It is clear that investor appetite for infrastructure is not fully sated. In many cases, institutions continue to fall short of their desired target allocation, as can be seen in Figure 1.
Broadening the definition of infrastructure
Following decades of ownership by private investors, there is a better understanding of the infrastructure sector, one that has seen a re-interpretation of what defines ‘core' infrastructure and the return expectations associated with it. Where airports were the foundation of many Australian infrastructure portfolios, they have since been joined by ports, energy transmission infrastructure and train stations.
Adjacent to these indispensable core infrastructure assets that often possess a strong market position, conservative leverage, predictable regulatory environment, and high barriers to entry, is an additional universe of opportunities. The adjacencies could be contractors or suppliers to core infrastructure assets, such as water treatment facilities servicing the sole water utility in a region, or an intermodal facility servicing a seaport.
This broadening definition of infrastructure allows more flexibility as investors navigate market cycles and consider the appropriate time to include this foundational asset class within their portfolios in ways similar to Australian investors, allocating to these adjacent sectors as they open up to pension capital. Based on the established track record of the asset class, its resilience to macroeconomic challenges, and its low correlation to other foundational asset classes, infrastructure's attraction becomes increasingly apparent.
The next decade of infrastructure
The global energy transition will arguably be the most significant structural change undertaken since the early Industrial Revolution. Over the next three decades, over $100trn will need to be deployed to completely restructure our economy – much of which will take the shape of infrastructure equity funding for renewable energy and climate change adaptation methods.
About the Author
Luba Nikulina is IFM Investors' Chief Strategy Officer, responsible for leading the development of IFM's global strategy with a focus on private markets solutions that meet the needs of Australian and global pension funds and their members. Luba joined IFM Investors from WTW, (previously known as Willis Towers Watson), where she was Global Head of Research, advising some of the world's largest asset owners on strategy, governance, and investments, managing a team of over 100 analysts. During her time at WTW, she worked in London and New York and was responsible for establishing WTW's private markets capabilities. Luba has over 25 years of investment industry experience and has served on the UK Government's Social Impact Investing Taskforce, City of London's Socioeconomic Diversity Taskforce, and co-chaired the Investment Consultants Sustainability Working Group.
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