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In rough markets, such as the one clients are contending with in 2022, it’s easy to assume nothing is working while losing sight of fundamentally credible opportunities.
Infrastructure is an example of that scenario. Starting in early 2021, infrastructure was all the rage for politicians and some investors. That enthusiasm culminated in passage of a –believe it or not – bipartisan infrastructure passage. Fast-forward a few months and market participants largely forget about infrastructure investing due in part to increasing partisan bickering and deteriorating equity markets.
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.
Infrastructure checks those boxes. That doesn’t mean it’s perfect, but it should be said that the the ProShares DJ Brookfield Global Infrastructure ETF (NYSEARCA:TOLZ) is beating the S&P 500 by nearly 900 basis points year-to-date.
Infrastructure for Income, Inflation Protection
In addition to easily outperforming the broader market this year, TOLZ sports a dividend yield of 4.19% -- far better than what investors earn with the S&P 500 and some baskets of longer-dated bonds despite mighty declines by both this year.
That elevated level of income is potentially relevant to clients not only because bonds are faltering, but also because high income strategies, particularly those with dependable dividend growth, act as valid inflation-fighting assets over the long-term. Infrastructure is worth considering for another reason: It’s one of this year’s better-performing portfolio diversifiers.
“One aspect of the recent bear market for stocks that has been especially painful for investors is that typical portfolio diversifiers—think bonds and real estate—have also suffered losses,” according to ProShares research. “There have been very few places to hide. Outside of commodities, one segment of the market that has performed well of late is infrastructure owners and operators. The Dow Jones Brookfield Global Infrastructure Composite Index measures the performance of companies that are owners and operators of pure-play infrastructure assets. Pure play means that a company’s primary business is the ownership and operation of infrastructure assets.”
It’s just one month, but using July 2022 as the example, pure play infrastructure equities soundly beat domestic and international equities, aggregate bond indexes, global real estate and intermediate-term Treasuries. That’s confirmation infrastructure can be a refuge in bear markets.
Infrastructure Yields Are Manageable
The aforementioned infrastructure legislation is a start, but the fact remains it doesn’t go far enough and plenty of other countries around the world have steep infrastructure needs, too. So there’s a global component to this investment thesis.
As such, many of the more credible competitors in this space have the resources to sustain and grow dividends, confirming that today’s high yields in the group aren’t cause for alarm. Plus, there’s some recession protection in this asset class.
“Even if we do enter a recession, people typically will still pay to heat their homes, turn on the lights and use their cell phones. With inflation running hot, owners and operators of infrastructure can often raise revenues in a manner that is consistent with inflation. These qualities have historically enabled infrastructure companies to generate stable cash flows, which has translated to high levels of yield for their shareholders,” concludes ProShares.