All roads lead to infrastructure

Key takeaways

• The world needs more, and better, infrastructure, with unprecedented demand across the globe being driven by structural mega forces like geopolitical fragmentation, demographic divergence, and digital disruption.
• As the world's infrastructure needs increase, assets under management in infrastructure funds have nearly tripled over the last 10 years, showing that more investors may be turning towards infrastructure as a dedicated sleeve in their portfolio.
• We believe there are compelling reasons for investors to make a dedicated allocation to listed infrastructure – for both potential growth opportunities and portfolio benefits like diversification, lower volatility, yield and inflation hedging.

Introduction

The world needs more, and better, infrastructure. By one estimate, global demand for infrastructure investment will total U.S. $68 trillion between now and 2040.¹ This capital may come from governments, and both private & public markets, to fund many of the power plants, data centers, gas pipelines, and ports that are needed. Public markets, i.e infrastructure operators listed on stock exchanges around the world, may offer investors access to this market.

Mega forces and Infrastructure

Infrastructure demand is being driven by several mega forces - big, structural changes that could affect investing now and far into the future. These include:

Digital Disruption & AI: Artificial intelligence, big data, and mobile connectivity have increased the demand for digital infrastructure like cell towers and data centers.

• Did you know: Global AI infrastructure is projected to surpass $220 billion in spending by 2028²

New Energy Demand: A focus on energy security and rising electricity demand from AI and the industrialization of emerging economies are driving significant investment in additional power generation and distribution.

• Did you know: The extra electricity needed by 2030 to power air conditioning could be around three times the extra demand from data centers³

A Fragmenting World: Supply chains are quickly changing in response to geopolitical shifts, reshoring manufacturing in places like the U.S. and creating new infrastructure needs to meet these demands.

• Did you know: 83% of executives consider supply chain resilience as critical of a need as cybersecurity⁴

Demographic Divergence: Developing nations require more infrastructure to service their growing cities and populations.

• Did you know: According to the UN, the global population could increase to 9.7 billion people by 2050, up from 8 billion in 2022⁵

Understanding our infrastructure needs

Infrastructure is often viewed as the backbone to the global economy and can be categorized into four key areas:

1. Energy
2. Digital
3. Transport
4. Waste and water

As the world's infrastructure needs have increased, more investors have been turning towards infrastructure as a dedicated sleeve in their portfolios, with assets under management in infrastructure funds nearly tripling over the last 10 years.

Listed infrastructure in portfolios

Many investors may only have small exposures to listed infrastructure, gained incidentally through investing in broad stock indexes. Given the recent concentration in major benchmarks, listed infrastructure companies make up only a small percentage of broad equity indices, at 3.2% and 2.4% of the MSCI World and S&P500 respectively.⁶

We believe there are compelling reasons for investors to carve out dedicated exposure to listed infrastructure:

Lower volatility: Public infrastructure can provide access to a traditionally low-volatility asset class, as Infrastructure stocks have historically exhibited more stable earnings growth through economic cycles versus the broader market.⁷ In our view, this stability is rooted in concentrated industry structure, sticky demand for services, highly regulated and contracted revenue streams.

Diversification: The limited overlap of infrastructure stocks and the broader markets may suggest that any increase in infrastructure allocation can add diversification benefits to a portfolio. Over longer time periods, public infrastructure has offered stable returns along with greater liquidity.⁸

Yield: An additional source of resilience are the potential capital returns within the infrastructure space, with the average dividend yield of FTSE Developed Core Infrastructure Index higher than 3%, more than double that available from the S&P 500.⁹

Inflation hedging: Infrastructure companies have historically performed well in higher-inflation environments. This performance can be attributed to several factors, including regulated infrastructure companies having explicit revenues tied to inflation and higher interest rates.

Conclusion

As mega forces power changes across the world, the world needs more infrastructure. Infrastructure impacts us all on a daily basis - from the roads we drive on to the energy we consume. As global listed infrastructure AUM grows, the asset class could play a role in portfolios for more types of investors, even those planning for retirement. Infrastructure’s long-term opportunity, diversification benefits, and strong inflation hedging characteristics, are all reasons why BlackRock expanded its LifePath Target Date Retirement funds in 2024 to include an allocation to publicly-listed infrastructure equity indices as part of their inflation hedging allocation.

Using the Thematic X-Ray in BlackRock’s Advisor Center 360° Evaluator, advisors can monitor thematic exposures, such as infrastructure, within their clients’ portfolios.

Investors interested in taking an active approach to gaining exposure to listed infrastructure companies across the world, may consider the iShares Infrastructure Active ETF (BILT). Those who are interested in U.S. infrastructure exposure, including access to both infrastructure owners & operators and infrastructure enablers, may consider the iShares U.S. Infrastructure ETF (IFRA), or an ETF that can provide exposure to global companies focused on transportation, communications, water and electricity services, such as the iShares Global Infrastructure ETF (IGF).

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