Despite a lacklustre couple of years, there seems to be a buzz around listed infrastructure funds.

Infrastructure has become more accessible over time. Not long before the global financial crisis, I was working in wealth management research; then, we were looking at how our clients could invest in the asset class. Given that it was largely unlisted, accessed through large, illiquid institutional funds, the answer was “with great difficulty”. If memory serves, we heaved a collective sigh and moved on.

The rise of listed infra funds have changed this and been rewarded by a significant inflow of cash. Between 2004 and 2023, global assets in the Lipper Global classification Equity Theme—Infrastructure grew from a mere £705m to £70.46bn. Assets peaked at £77.46bn in 2022 (chart 1). Asset declines from 2022 to 2023 are almost entirely the result of market movements, as flows were muted over the period. Over the period, ETF assets have risen from 4.26% to 15.62% of the whole.

Chart 1: Global Assets of Equity Theme—Infrastructure Mutual Funds and ETFs (2004-2023, £bn)

Source: LSEG Lipper

Mind the Gap

The investment case for infrastructure is not new. First, correlation to global equities and bonds is low. More specifically, analysts have identified a supply shortfall of infrastructure investment, which should equate to greater returns. Eight years ago, consultancy firm McKinsey identified an $800bn annual shortfall between actual and required global infrastructure investment.

This is particularly the case regarding sustainable infrastructure, which plays a key role in meeting development objectives. Nevertheless, despite its importance, there remains a major financing shortfall for sustainable infrastructure. The average annual infrastructure investment gap from 2022 to 2040 is US$650bn, increasing at an average pace of 3% annually, according to the European Bank for Reconstruction and Development.

This is despite the increasing flows to green assets. For example, in 2022, 85% of new energy projects were in renewable energy, compared to an average of 63% over the last five years, according to the World Bank. This is a trend that’s evident at the fund level, as between 2004 and 2023, responsible investment assets have grown from 2.12% of listed infra funds to 34.35% (chart 2).

Chart 2: Global Assets of Equity Theme—Infrastructure: Green versus Brown (2004-2023, £bn)

Source: LSEG Lipper

Hard Times

It’s easy to see why infra has struggled over the past period. Infrastructure assets tend to come with a lot of debt attached, often considered bond proxies, and therefore vulnerable to the rising rate environment since 2022.

Chart 3: Green versus Brown Infrastructure Performance, 2019-2023 (%)

Source: LSEG Lipper

Green infra outperformed conventional into the Covid-19 pandemic and has subsequently lagged on a rolling 12-month basis (chart 3). In 2021, that was likely due to the huge outperformance of brown energy, leaving other sectors (and, by definition, sustainable ones) in its wake. Given its bond-like characteristics, you would expect infra to struggle in an environment of elevated rates; less so, why green should struggle more than brown without taking a more detailed look at the aggregate portfolio exposures of both.

Hazarding a guess, it may be that sustainable infra assets will tend to be newer. Infra assets carry more debt early in their life, so newer ones will have proportionately more debt to service, which will punish them more as debt costs rise.

Advocates for (sustainable) infra investing—which on occasion have included me—have pointed to this mismatch for pretty much the past decade, yet still it persists. Despite the apparently baked-in demand, infra—direct and listed—is struggling. Hamilton James, the former vice chair of Blackstone Group, stated in a recent article in the Financial Times. “My guess is we are in a part of the cycle where returns will be lower. Rising rates and high stock prices make it harder to do interesting deals and there is a lot of capital chasing after investments”. We therefore have an anomaly of both too much and too little capital.

How long can this anomaly persist? Your answer to this question is likely to hinge on how efficient you believe markets to be. My favourite (and most overused) Keynes quote is “the market can remain irrational longer than you can stay solvent”. Or, indeed, based on the widening investment gap identified by the EBRD, possibly alive.

All things considered, however, infra is something that should stay on investors’ radars, especially as rates reduce. In some cases, where infra cash flows are inflation-linked this will feed through, which will also be a positive. Another factor is that the overall market should pick up. While that’s been the hope for some time, initiatives such as the US Inflation Reduction Act will be a boost for the sector, particularly those linked to the green economy.

How these factors combine to form a return number in hard cash is harder to determine.

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