Among the variety of asset classes advisors are fielding more inquiries about this year (the trend probably dates back to the back half of 2020) is infrastructure.
Obviously, politics is playing a significant role in the renewed interest in infrastructure assets. On the 2020 campaign trail, President Biden promised bold action on infrastructure and while the size and scope of his plan is likely to be trimmed – that's how politics work – it's still likely to be the largest such package in this country's history, assuming it makes to his desk.
With that in mind, it's not altogether surprising that the S&P Global Infrastructure Index is higher by 8.53% year-to-date. Indeed, it's easy to get wrapped up in the political component of infrastructure investing, particularly when it indulges clients' home country biases, of which there are plenty.
Where advisors can add value in the infrastructure conversation is showing investors not only the utility of this asset class, but how to refresh the proposition and it's one in need of re-invigoration.
“Some infrastructure strategies may focus on traditional projects like roads, bridges, energy assets and water/waste management facilities,” notes FlexShares. “Today, though, critical infrastructure includes newer technologies like cellular towers and broadband networks, as well as so-called 'social infrastructure,' which includes health care facilities and privatized postal services.”
Familiar Foe Bolsters Case for Infrastructure
As noted above, it's easy for clients to get interested in infrastructure when politicians talk up the issue. However, the unfortunate legacy of the U.S. and infrastructure is long on talk, short on results. In other words, investors banking on politicians – regardless of party – to help them out when it comes to infrastructure investing are barking up the wrong tree.
Good news: Advisors have another, equally credible reason to discuss infrastructure assets with clients and it comes by way of inflation. Infrastructure resides in the hard assets realm – an asset class with a sterling history of guarding portfolios against rising consumer prices.
“Traditional infrastructure projects historically gain their inflation-hedging potential from the fact that they tend to be capital intensive, relatively monopolistic and subject to steady demand no matter the economic environment,” according to FlexShares. “These qualities may often translate into stable cash flows and the ability to pass cost increases on to customers.”
The case for infrastructure as an inflation-fighting tool is playing out in real time this year. The FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA) is up 10.59% year-to-date while the Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index is slightly lower.
Admittedly, that's not an apples-to-apples comparison, but it proves two points. First, infrastructure works as an inflation fighter. Second, equities are often the superior choice to TIPS when it comes to guarding against rising consumer prices.
Putting It Into Practice
Of course, advisors must perform their own diligence, but the aforementioned NFRA – a $2.73 billion fund with a track record of nearly eight years – accomplishes the aim of refreshing infrastructure investing while providing clients with needed inflation-fighting capabilities.
“Targeting modern infrastructure may also require a more sophisticated way to identify companies that operate infrastructure assets,” according to the issuer. “We believe that legacy infrastructure indices may not be the most efficient way to uncover investment opportunities, because many indices have historically been organized using top-down sector codes that classify common stocks.”
Bottom line: It's advisable to go global infrastructure as it mitigates the potential for domestic political disappointment. NFRA checks that box while providing clients with some unique avenues not found in all competing strategies.
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