5 benefits of investing in infrastructure

03 May 2023 by National Bank Investments

As an increasing part of investment portfolios, infrastructure assets are a great diversifier in inflationary times.

Discover how they may benefit your clients.

Characteristics of infrastructure assets

Infrastructure assets are becoming more familiar to investors and are being used increasingly as part of a global asset allocation. This is due in large measure to the compelling characteristics of the infrastructure assets themselves:

Monopolistic - Infrastructure components typically demand large-scale investments with very high fixed costs, creating high barriers to entry and monopolistic or quasi-monopolistic characteristics. Geography also tends to limit the proliferation of competing infrastructure projects.

Inelastic demand - Since the physical assets and services that make up infrastructure are necessities; demand does not fluctuate with price changes. Relatively inelastic demand makes infrastructure less sensitive to business cycles.

Stable cash flows - Long-term contracts between governments and private managers promote steady cash flows generated by fees or tolls on underlying assets. Concessions granted by governments to private entities to manage infrastructure assets can last up to 99 years.

Inflation hedge - As replacement costs of physical assets increase in an inflationary environment, they protect the value of infrastructure investments. Moreover, fees for the use of infrastructure are frequently linked to inflation through a regulated return framework or a contractually specified rate of return.

Durability - Infrastructure assets often last more than 50 years, with little or no risk of redundancy or technological obsolescence.

Given these characteristics, infrastructure can be considered a distinct asset class, with potentially more stable income-oriented returns that are not highly correlated with those of other major asset classes.

The benefits

Historically, institutional investors have preferred direct or unlisted infrastructure investments in this asset class. However, listed global infrastructure has provided an investment opportunity for a wide range of investor types and may provide benefits such as:

Broad diversification by country, sector, and holding
Asset liquidity that facilitates portfolio rebalancing
Temporary market mispricings that the active portfolio manager can seek to exploit
Access to many high-quality infrastructure assets (airports, seaports, and public transportation systems).

Listed infrastructure tends to have little overlap with broader global equity indices and can help provide greater diversification in a broader portfolio. The stability of cash flows, inelastic supply/demand characteristics, and the essential service nature of underlying assets typically result in the asset class providing defensive characteristics during periods of economic instability. This is quite apparent when viewing the upside and downside capture of the asset class which exhibits solid upside participation with much lower downside capture.*

S&P Global Infrastructure Index up / down capture vs. indices Dec. 1, 2021 – Dec. 30, 2022

S&P Global Infrastructure Index up & down capture vs. indices Dec. 1, 2021 to Dec. 30, 2022

Also, listed infrastructure has historically provided strong returns during inflationary periods given its underlying inflation hedging characteristics.**

For these reasons, listed infrastructure provides inherent value and makes an attractive investment in a diversified portfolio.

Our real asset income investment products

Discover the NBI Global Real Assets Income Fund (“the Fund”) and the NBI Global Real Assets Income ETF (NREA) (“the ETF” and together “the Funds”) sub-advised by Nuveen Asset Management, LLC.

NBI Global Real Assets Income Fund

NBI Global Real Assets Income ETF (NREA)

The Funds aim to provide income and long-term capital growth while focusing on hedging against inflation. They invest, directly or through investments in securities of other mutual funds, in a portfolio comprised primarily of common shares of companies located around the world in industry sectors associated with real assets.

Legal notes

*Dec 1, 2001, is the inception date of the S&P Global Infrastructure Index. Upside/Downside capture explains how well a portfolio performs in time periods where the benchmark’s returns are greater/less than zero. Source: Morningstar Direct, Nuveen **Annualized performance during months with positive inflation 1 Jan 2002 - 31 Dec 2022 Commodities: S&P GSCI Index, Global infrastructure equities: S&P Global Infrastructure Index, High yield corporates: Bloomberg U.S. Corporate High Yield Index, U.S. real estate equities: MSCI U.S. REIT Index, Global real estate equities: FTSE EPRA Nareit Developed Index, Non-U.S. equities: MSCI ACWI Ex USA Index, U.S. equities: S&P 500 Index, Global equities: MSCI World Index, Global bonds: Bloomberg Global Aggregate Index, Inflation: U.S. BLS CPI All Urban NSA 1982–1984, U.S. bonds: Bloomberg U.S. Aggregate Bond Index. Calculated using annualized returns from months with positive inflation (U.S. BLS CPI All Urban NSA 1982–1984). Performance data shown represents past performance and does not predict or guarantee future results. Source: Morningstar Direct, Nuveen

The information and opinions herein are provided for information purposes only and are subject to change without notice. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc. The views expressed regarding a company, a security, an industry, a market sector in particular, future events (such as market and economic conditions), a company’s or a security’s performance, upcoming product offerings or other forecasts are solely those of Nuveen Asset Management, LLC and do not necessarily represent the views of National Bank of Canada and its subsidiaries (the “Bank”). These views are subject to change at any time based on market or other conditions and could cause actual results to differ materially from the ones anticipated by Nuveen Asset Management, LLC. The Bank disclaims any responsibility to update such views. They do not constitute recommendations to buy or sell nor
investment advice. NBI Funds (the “Funds”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. NBI exchange-traded funds (the “NBI ETFs”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Management fees, brokerage fees and expenses all may be associated with investments in NBI ETFs. Please read the prospectus or ETF Facts document(s) before investing. NBI ETFs are not guaranteed, their values change frequently and past performance may not be repeated. NBI ETFs units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return any predetermined amount at maturity. These index providers are included in this document: Standard & Poor’s, FTSE, MSCI and Bloomberg. These companies are licensing their indices “as is”, make no warranties regarding same, do not guarantee the suitability, quality, accuracy, timeliness and/or completeness of their indices or any data included in, related to or derived therefrom, assume no liability in connection with their use and do not sponsor, endorse or recommend National Bank of Canada and its wholly owned subsidiaries any of their products and services. The above index providers do not guarantee the accuracy of any index or blended benchmark model created by National Investment Bank using any of these indices. No responsibility or liability shall attach to any member of the Index Providers or their respective directors, officers, employees, partners or licensors for any errors or losses arising from the use of this publication or any information or data contained herein. In no event shall the above Index Providers be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, legal or other expenses, or losses (including, without limitation, lost revenues or profits and opportunity costs) arising out of or in connection with the use of the content, even if advised of the possibility of such damages. The FTSE/TMX indices are trademarks of the LSE Group. S&P Indices are trademarks of S&P Dow Jones Indices LLC, a division of S&P Global. MSCI indices are trademarks of MSCI Inc. Bloomberg® and its indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by National Bank Investments Inc. (“NBI”). Bloomberg is not affiliated with NBI, and Bloomberg does not approve, endorse, review, or recommend NBI’s products. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to NBI’s products.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under licence by National Bank Investments Inc. National Bank Investments is a signatory of the United Nations supported Principles for Responsible Investment, a member of Canada’s Responsible Investment Association, and a founding participant in the Climate Engagement Canada initiative.