Over the past few years, beginning in early 2022, interest rates rose for the first time since the 2007-2008 financial crisis. This trend provided investors with numerous opportunities to generate meaningful cash income from fixed-income asset classes within their portfolios. However, as central banks respond to inflation levels returning to within their target ranges, some are beginning to lower interest rates. In September 2024, the U.S. Federal Reserve made its first cut since it started raising rates in 2022, and the market forecasts that rates will continue to decline throughout the remainder of 2024 and into the coming years.
As rates decline, the sources of stable cash flow from the fixed-income portion of investors’ portfolios are also reducing. This situation underscores one of the key advantages of infrastructure assets in investors' portfolios and explains why the Canadian Maple 8 pension funds have been investing in infrastructure for decades, with a 12% weighted average allocation to this asset class.1 Infrastructure assets typically generate predictable cash flows due to long-term contracts and regulated pricing structures. For instance, electric utility companies operate under regulatory regimes that ensure a steady income stream. Many institutional investors have long considered infrastructure a substitute for fixed income, particularly in a low-interest-rate environment.
The Role of Infrastructure Assets as a Fixed Income Substitute
In addition to long-term predictable cash flows, key characteristics of infrastructure assets include their essential nature, high barriers to entry or monopolistic traits, and inflation-linked revenue. Many infrastructure contracts are indexed to inflation, meaning that as the cost of living rises, so do the revenues generated from these assets. This feature makes infrastructure assets a powerful tool for preserving purchasing power during periods of high inflation, such as those we recently faced.
Enhancing Portfolio Diversification with Infrastructure Investments
Including infrastructure assets in an investment portfolio can also enhance diversification. These assets often exhibit low correlation with traditional equities and fixed income, which helps mitigate risk.2 In a market characterized by volatility or economic uncertainty, exposure to infrastructure investments that tend to be less sensitive to economic cycles provides portfolio resilience and can lead to more stable overall performance.
These characteristics suggest that infrastructure assets can be viewed as a potential all-weather asset class. Historically, infrastructure assets have outperformed other asset classes during times of high inflation and rising rates, thanks to their inflation-linked revenues and long-term fixed-rate debt.3 At the same time, infrastructure maintains the benefits of equity investments when rates are declining by enabling value-creation initiatives and the potential for outperformance through refinancing with lower-cost debt.
Nicola Global Infrastructure Limited Partnership
The Nicola Global Infrastructure Limited Partnership (NGI) seeks to provide investors access to a globally diversified portfolio of infrastructure assets that have stable cash flows underpinned by revenue that is 60% long-term contracted and 21% regulated. NGI offers a 4% per annum cash distribution that is paid monthly and has a net return target of 7-9%.
Learn more about the Nicola Global Infrastructure Limited Partnership.
- 1
Most recent annual reports available as of September 30, 2024.
- 2
From Q1 2008 to Q1 2024, global core infrastructure had a correlation coefficient of 0.1 with global equities. J.P. Morgan Guide to Alternatives, August 2024.
- 3
Other asset classes, such as global equities, global fixed income, and global real estate. BlackRock – Adding Structure to Your Portfolio with Infrastructure, June 2023.
- 4
As at September 30, 2024.
Disclaimer
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. All investments contain risk and may lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. This material contains targeted returns; actual returns may vary. This is not a sales solicitation. This investment is intended for tax residents of Canada who are accredited investors. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions.
