The idea of what constitutes a diversified portfolio has evolved over recent decades to include ever more asset classes alongside the more ‘traditional’ exposures to equities and bonds.
Research from BlackRock looking at US endowment funds – often seen as a paragon of diversification – showed the average endowment portfolio in 2020 had more exposure to alternative assets, including hedge funds (23%), private equity (22%) and real assets (11%), than to equities and bonds combined. This led to a portfolio with equity-like exposure to economic growth yet lower interest rate, inflation and credit risk than a ‘balanced’ 70:30 allocation between equities and bonds.
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While the average UK client portfolio is unlikely to have nearly a quarter of its assets in either hedge funds or private equity, real assets – broadly speaking, property and infrastructure – have been a popular choice in the post-financial crisis era of ultra-low interest rates, on account of their enticing yields. Yet can they retain their attraction in a higher-rate, higher-inflation environment?
The short answer is probably ‘no’ – at least in the near term – when it comes to commercial property, a sector troubled by post-pandemic working practices, the decline of high-street retail, oversupply in logistics assets and higher borrowing costs. The opposite, however, may be true in infrastructure, where macroeconomic and policy tailwinds are arguably not reflected in current valuations.
What is infrastructure?
Ed Simpson, head of energy and infrastructure at Gravis Capital Partners (GCP), describes the sector as “the basic physical structures and facilities needed for the operation of society”.
These may include social infrastructure assets, such as schools and hospitals; economic infrastructure assets, such as toll roads and telecom towers; and, increasingly, renewable energy infrastructure, a vital component of the push towards net-zero carbon emissions.
Historically, many infrastructure assets may have been government-owned, as the high cost of construction means they need to be operated for a long time before the outlay is recouped. This began to change in the 1980s and 1990s, however – both through the privatisation of state-owned utility companies and the advent of public-private partnerships (PPPs) such as the UK’s Private Finance Initiative (PFI).
Read the full article in Portfolio Adviser’s July/August 2023 magazine
