We recently added Global Infrastructure funds to the MyFolio ranges. This reflects our belief in the diversification benefits that the asset class provides to portfolios, given the innate qualities of infrastructure assets and their cashflows. We have observed the powerful secular dynamics spurring investment in this wide-ranging asset class, and we believe that these trends have the potential to enhance returns.

Evolving diversification

Diversification is the cornerstone of the MyFolio SAA investment philosophy. We believe that over the long term the compounding of returns from financial assets with an attractive premium for their inherent risk is the most powerful way for pension savers to achieve their financial goals.

One of the key benefits of diversification is to enable investors to remain invested during periods of heightened uncertainty. This is particularly important when central expectations are not met, and/or when the performance of broad global equity indices faces challenges.

Source: abrdn, as at end December 2023

No single asset can perfectly diversify returns for investors, without effectively paying an insurance premium. But a collection of assets that each have positive diversification characteristics can improve outcomes for investors while also benefiting returns. It's for this reason we've consistently sought to improve diversification within MyFolio. You can see the evolution of MyFolio diversification in Chart 1.

Defining characteristics

The MyFolio approach to infrastructure is defined by our desire for a non-cyclical exposure with stable cashflows and an element of embedded inflation or regulatory protection. Infrastructure is a surprisingly varied sector, and can include assets as diverse as schools (social infrastructure), utilities, toll roads, airports and renewables. Within MyFolio, our clear and deliberate preference for more stable and predictable cashflows attracts us to utilities and communication services as well as industrials. Consequently, we have a lower weighting towards energy and more cyclical assets.

Stable cashflow qualities provide assets with longer-duration characteristics. As a result, infrastructure has demonstrated some diversifying properties and resilience during periods when broader equity markets have struggled.

Source: Morningstar*. Rising/falling bond markets represented by the performance of US 10 year yields. The respective indices are; FTSE All Share total return (tr)**, ICE BofA Global High Yield tr Hedged GBP, MSCI All Country World Index GBP, and MSCI World Infrastructure tr GBP***. Monthly data from March 2003 to October 2023. Past performance is not a guide to future results.

Chart 2 demonstrates this by showing the performance of various indices against changes in bond yields. While past performance is not always a guide to future results, history suggests that infrastructure performs relatively well compared with other assets during periods when bond yields fall. This is because stable, regulated infrastructure cashflows can be discounted long into the future. Although infrastructure performance has historically been less favourable compared with other asset classes in months when yields rise, it has still provided a level of return.

Return expectations

Diversification is important but not if it comes at undue cost to returns. Buying insurance will hedge risk, but at the cost of a regular premium. Our goal is to improve diversification while seeking to enhance, or at least not unduly degrade, returns.

We believe Global Infrastructure has the potential to fulfil this aim. Population growth, rural-to-urban migration and the reshoring of supply chains are just some of the dynamics contributing to demand. In 2017 the World Bank estimated that $94 trillion of investment is required to address infrastructure gaps¹.

Popular with private equity

Private equity investors recently demonstrated significant interest in infrastructure investment. Brookfield Investment Partners achieved its largest ever fund-raising at £28 billion (bn) specifically for infrastructure assets², while BlackRock recently bought Global Infrastructure Partners for $12.5bn. Commenting on these transformational purchases, BlackRock’s founder and CEO Larry Fink summed up his bullish view of infrastructure investments as follows:

“Infrastructure is one of the most exciting long-term investment opportunities, as a number of structural shifts reshape the global economy. We believe the expansion of both physical and digital infrastructure will continue to accelerate, as governments prioritise self-sufficiency and security through increased domestic industrial capacity, energy independence, and onshoring or nearshoring of critical sectors. Policymakers are only just beginning to implement once-in-a-generation financial incentives for new infrastructure technologies and projects.”³

Climate considerations

Climate transition, adaption and mitigation will also require considerable investment in both existing and new infrastructure projects. PWC estimates that the UK will require £400bn of additional infrastructure investment between now and 2050 to hit Net Zero climate pledges⁴. Britain needs to increase new electricity grid infrastructure by a factor of seven to meet both Labour and Conservative pledges⁵.

In the US, the Bipartisan Infrastructure and Jobs Act as well as the Inflation Reduction Act provide $190bn and $370bn of tax credits for investment in infrastructure and renewable energy projects. Increasingly, given the current unfortunate geopolitical outlook, such infrastructure and energy policies are becoming central to energy security as well as the climate transition.

Final thoughts

We believe that infrastructure, according to our definition, helps improve the diversification of portfolios without unduly affecting expected returns. The global outlook for infrastructure investments remains buoyant, with the combination of basic requirements, energy security and the climate transition providing significant demand for investment.

Visit the MyFolio website or contact one of our local business development representatives to find out more about multi-asset solutions designed to meet your clients’ needs and long-term financial goals.

* © 2024 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. For more detailed information about Morningstar's Analyst Rating, including its methodology, please go to:
http://corporate.morningstar.com/us/documents/MethodologyDocuments
/AnalystRatingforFundsMethodology.pdf

The Morningstar Analyst Rating for Funds is a forward-looking analysis of a fund. Morningstar has identified five key areas crucial to predicting the future success of a fund: People, Parent, Process, Performance, and Price. The pillars are used in determining the Morningstar Analyst Rating for a fund. Morningstar Analyst Ratings are assigned on a five-tier scale running from Gold to Negative. The top three ratings, Gold, Silver, and Bronze, all indicate that our analysts think highly of a fund; the difference between them corresponds to differences in the level of analyst conviction in a fund’s ability to outperform its benchmark and peers through time, within the context of the level of risk taken over the long term. Neutral represents funds in which our analysts don’t have a strong positive or negative conviction over the long term and Negative represents funds that possess at least one flaw that our analysts believe is likely to significantly hamper future performance over the long term. Long term is defined as a full market cycle or at least five years. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detailed information about the Morningstar Analyst Rating for Funds, please visit http://global.morningstar.com/managerdisclosures

** FTSE International Limited (‘FTSE’)

FTSE International Limited (‘FTSE’) © FTSE 2024. ‘FTSE®’ is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. RAFI® is a registered trademark of Research Affiliates, LLC. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

*** The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis, should not be taken as an indication or guarantee of any future performance analysis forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI” Parties) expressly disclaims all warranties (including without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (www.msci.com)