Trending
Amid political haranguing and, let’s be honest, disappointment, infrastructure has largely faded from the near-term investment lexicon.
That shouldn’t be the case and while no one is saying advisors need to go “infrastructure crazy,” it is on advisors to navigate clients through perilous market environments such as the current one. On that note, it cannot be ignore that infrastructure is posting some remarkable performances this year.
Take the case of the ProShares DJ Brookfield Global Infrastructure ETF (NYSEARCA:TOLZ). That fund is higher by 6.69% year-to-date while the S&P 500 is down 12.47% as of June 7.
Infrastructure’s strength this year isn’t all that surprising. This is an asset class laden with hard assets, making in an ideal inflation-fighting elixir. Obviously, infrastructure’s performance this year is impressive, if not expected, but advisors are in luck because there’s evidence suggesting clients can benefit from infrastructure allocations beyond this year.
Timing Is Right Infrastructure
As advisors know, timing is meaningful in investing and while market timing is often a futile endeavor, certain asset classes perform better than others in specific market climates. For example, in 2022, advisors are almost certainly discussing with clients asset classes with propensities for durability when inflation is high and when interest rates rise.
Let’s not nitpick because infrastructure’s performance this year is likely more the result of high inflation than rising rates, but that’s also confirmation that there are credible, easy-to-digest inflation-fighting strategies to discuss with clients.
“Over the course of two economic cycles, going back to 2008, infrastructure owners and operators have outperformed the S&P 500 in inflationary periods,” according to ProShares research. “When year-over-year inflation exceeded the average of 2.25%, 25 bps above the Fed target rate, the Dow Jones Brookfield Global Infrastructure Composite Index outperformed the MSCI ACWI Index by 1.1% and the S&P 500 by 0.4% monthly on average. That translates to annual outperformance of more than 13%.”C
Clearly, those are impressive data points, but this is where things get interesting and where advisors can add value for clients interested in infrastructure. When it comes to infrastructure investing, success and purity are intimately linked. As in “pure play.” That means advisors should exclude construction services providers and engineering firms from the infrastructure conversation because those firms lack the purity necessary for superior long-term investor success.
Yield, Of Course
One of the primary reasons investors embrace infrastructure – and this speaks to inflation-fighting credibility – is income. Both high-dividend and dividend growth strategies are outperforming the broader this year, in some cases handily, and infrastructure offers exposure to both concepts.
“Infrastructure companies often offer attractive yield, while also providing potential for capital appreciation. Since 2014, infrastructure owners and operators have provided yield meaningfully higher than that of the S&P 500 or the 10-year US treasury, potentially helping satisfy investor yield appetite,” adds ProShares.
The aforementioned TOLZ yields north of 3%, which is far more than clients earn on broader equity index funds or aggregate bond strategies – both of which are slumping this year – indicating that now is a good time to evaluate infrastructure opportunities.