2023 BlackRock Infrastructure
Adding structure to your portfolio with infrastructure
In a market regime of higher macro and market volatility, infrastructure assets offer the potential of stable returns, inflation protection, diversification benefits and an opportunity to drive the energy transition forward.
Below is an excerpt from the full report on the generational opportunity in infrastructure investing and the role infrastructure can play in portfolios.
A generational opportunity for today’s portfolio challenges
The new regime at play
We are seeing the new regime of higher macro and market volatility play out. We see rates staying higher for longer to deal with elevated inflation, even as recessions loom. Increased volatility gives way to heightened uncertainty, with not many investors being able to predict how markets will react.
Beta tailwinds are gone
The widely held approach that worked during the Great Moderation will no longer allow investors to extract the returns they once did. Mining alpha returns now requires an active and nimble approach where infrastructure is a key component.
A historic investment opportunity
Infrastructure plays a central role in accelerating the transition forward. The next 30 years will be transformational in the way we make and use energy, move goods and people, and reshape the environment. The International Energy Agency (“IEA”) estimates a need for US $100 trillion of new infrastructure investment by 2050.
Fundamentals have aligned
Conditions to boost further infrastructure investment are now more aligned. Global policies are providing unprecedented incentives and investment in infrastructure has reached new heights.
Why is infrastructure essential?
Infrastructure is experiencing remarkable growth as economies globally are racing to bridge the infrastructure gap to propel themselves forward into a more modernized future. Infrastructure continues to prove it is the essential fabric of our society and critial to a functioning and growing economy that provides better quality of life, enables technology development, creates employment at scale and will power the energy transition.
$3
for every $1 spent in infra, we add $3 of GDP growth1
$25
trillion of technology infrastructure needed by 20502
$34
billion air quality improvements through 20253
200
million of clean energy jobs will be gained by 20504
$100
trillion of new infrastructure investment needed to drive the transition forward2
Source: BlackRock, 22 May 2023. Sources: 1 Council on Foreign Relations, November 2021. 2 International Energy Agency (IEA), World Energy Outlook, 2022. 3 World Economic Forum, data as of January 2022. 4 McKinsey Center for Future Sustainability Insights, Outlook 2022.
Stable returns: The resiliency of infrastructure over time
Getting the asset mix right will be more difficult going forward
We find that the risk premium, or the compensation investors demand for taking risk, will be higher going forward. Therefore, we believe portfolios built for the new regime will need to account for a higher allocation to infrastructure assets.
Resilient returns and stable income over time
Historically, infrastructure assets have delivered stable income and return premium across various market cycles. Last year when global stocks and fixed income fell more than 20%, infrastructure assets delivered a 5% total return.
Infrastructure holding up well vs. other asset classes
Historically infrastructure offers equity-like returns, at a lower risk profile. Infrastructure return dispersion over the last 20 years stands at 35%. Comparable to the fixed income return dispersion of 36% and is less than half of the 77% equities’ range.
The three main reasons why this is the case are:
- Intrinsic value. Infrastructure tends to act as a store of value throughout the economic cycle given its essential nature.
- Diversification. Infrastructure assets have idiosyncratic risk factors that can diversify economic growth and real rate risk concentration. The returns are derived by the overall performance of the asset, which are disconnected from capital markets trends.
- Low volatility. The revenues tied to infrastructure assets are backed by long-term contracts with creditworthy entities, helping deliver stable cash flows.
Return dispersion
| Infra | Equities | Bonds | |
| Lowest | -2.8% | -42.2% | -19.9% |
| Highest | 32.8% | 34.6% | 16.5% |
| Range | 35.7% | 76.8% | 36.4% |
Past performance is not indicative of future results. All investing is subject to risk, including possible loss of money invested. Performance results will vary. Accordingly, performance may be higher or lower than results cited. Source: BlackRock, 22 May 2023. Direct infra is represented by the EDHEC infra 300 index; Global Equities is the MSCI ACWI Global Equities and Fixed Income is BBG Barclays Global Aggregate Index.
These characteristics generally allow infrastructure investments to perform well on a relative basis throughout economic cycles.
Infrastructure as a potential inflation hedge
Living with inflation. The cost of inflation staying somewhat higher for longer means that strategic portfolio planning should include specific inflation mitigations.
The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results.
Source: Bloomberg, Barclays. EDHEC for Infrastructure equity; NCREIF for Global Real Estate; MSCI for Global Equities; and BBG Barclays Global Aggregate Index TR for Global fixed income, as of May 22, 2023 (annual data since 2001). The charts are based on an illustrative US economic scenario. Past performance is not indicative of future results. You cannot invest directly in an unmanaged index. High growth periods are when U.S. GDP > 2.5% and Low growth periods are when U.S. GDP < 2.5%. High inflation periods are when U.S. CPI > 2.5%.
Staying ahead of inflation with infrastructure assets
Infrastructure is a unique asset class with characteristics that allow to provide resilience in the current rising rate and high inflationary macroeconomic environment.
Historical infrastructure outperforms during high inflationary times
The returns of private infrastructure companies tracked in the EDHEC 300 index increased by 23% through low growth and high inflation scenarios.
Explicit linkages to inflation
Infrastructure assets have long term revenues that are often contracted or regulated in nature, with examples including power purchase agreements (“PPAs”) or take-or-pay contracts.
Building more resilient portfolios
A dedicated infrastructure position, held as part of a broadly diversified long-term portfolio, has the potential to increase both the efficiency and durability of the portfolio’s returns.
Source: BlackRock, May 22, 2023, based on BlackRock's Capital Market Assumptions. Expected Returns are net of fees and expenses and calculated using a model fee equal to 0.30%, which represents the highest advisory fees charged for an institutional client. Expected returns also reflect reinvestment of dividends, capital gains, and interest but do not reflect the deduction of taxes. Had that expense been deducted, performance would have been lower. There is no guarantee that the capital market assumptions will be achieved, and actual risk and returns could be significantly higher or lower than shown. Hypothetical portfolios and risks shown are for illustrative discussion purposes only and no representation is being made that any account, product or strategy will or is likely to achieve results similar to those shown. Expected risk is calculated using the expected volatility assumptions. Expected risk is defined as annual expected volatility and is calculated using data derived from portfolio asset class mappings, using the Aladdin portfolio risk model. This proprietary multi-factor model can be applied across multiple asset classes to analyze the impact of different characteristics of securities on their behaviors in the marketplace. In analyzing risk factors, the Aladdin portfolio risk model attempts to capture and monitor these attributes that can influence the risk/return behavior of a particular security/asset. See "Capital Market and Modeling Assumptions". Past performance is not a guarantee or reliable indicator of future results.
Equity and fixed income relationship, from negative to positive
The approach that worked during the Great Moderation saw long term bonds work as a cushion against risk asset selloffs.
Low correlation to other asset classes
Infrastructure equity exhibits low correlation to traditional asset classes due to its idiosyncratic characteristics.
Diversification benefits.
Our research finds that adding infrastructure to a traditional 60/40 portfolio, can potentially increase returns while diversifying risk.
Positive, measurable outcomes
Infrastructure assets provide positive, measurable outcomes and are critical to driving the transition forward.
39
thousand jobs created locally through project construction and operations
12
thousand Olympic swimming pools of water saved per year
$209
million local community contributions per year
5.2
million homes powered with clean energy
97.4
million Metric tons CO2 emissions avoided every year1
BlackRock Aladdin Risk Model with asset class exposures as of 22 May 2023. 1974 Historical Stagflation Scenario. Policy variable shocks are based on actual factor returns in the year 1974. BlackRock’s US Fundamental Risk Equity Model equity factors are proxied by Fama-French factors with volatility adjustment. For more information, see "Stress Test Scenario Definitions" and "Stress Test Scenarios Methodology, Assumptions and Limitations" at the end of this presentation.
