SSGA-SPDR: The case for infrastructure in uncertain markets
Biden’s victory raised expectations for infrastructure spending in the US, sparking a surge of flows to end 2020. As an asset class, infrastructure can offer uncorrelated returns to equities and thus appeals to certain investors. Moreover, an exposure that combines both equities and corporate bonds can provide investors with a degree of downside buffer in uncertain markets.
Despite the market turmoil in 2020, investor demand for infrastructure assets remained strong. Last year, investors added $3.5 billion to European-domiciled equity infrastructure mutual funds. Flows accelerated in November and December, with $900 million added in those two months alone. The flows surged as investors became more certain that Biden would win the US presidency and more hopeful that a raft of fiscal stimulus would be passed by Congress, including increases in infrastructure spending.
Although flows were strong during in 2020, returns were more disappointing for infrastructure equities. Of note, the S&P Global Infrastructure Index fell 6.5% last year while the MSCI World Index climbed 15.9%.
A more balanced approach to infrastructure investing could have provided stronger returns last year. For example, the Morningstar Global Multi-Asset Infrastructure Index rose 8.6% in 2020. The index managed to achieve this performance due to the 50% allocation to infrastructure corporate bonds, which help to reduce correlation to equities during market falls and therefore help to reduce drawdowns in down markets.
Over the longer term the inclusion of corporate bonds has provided a downside buffer. During all periods when the market saw a significant fall, the Morningstar index performed far better than the S&P Global Infrastructure index.
Given a large reason to allocate to infrastructure assets is to reduce correlation to traditional equity markets, and thus achieve uncorrelated returns, using an equity-only strategy is not the most effective approach. Hence, we believe taking the more balanced approach by including an allocation to infrastructure corporate bonds gives a closer approximation to the underlying infrastructure asset class.