Investors turn to infrastructure equity funds amid inflation fears
European investors’ interest in infrastructure – including indirect exposure via equities – is growing in response to rising inflation, according to the latest issue of The Cerulli Edge European Monthly Product Trends report published by global research and consulting firm Cerulli Associates.
“One of the few pockets of the European market to record asset growth during the first half of 2022 has been infrastructure equity funds,” says Fabrizio Zumbo, director at Cerulli.
Infrastructure equity funds are products that invest in listed companies involved in infrastructure. Examples include utilities, highways and rail tracks, airport services, marine ports, oil and gas storage, and transportation.
Infrastructure equity funds in Europe saw their combined assets under management (AUM) rise by more than 10 per cent to EUR29.0 billion (USD29.4 billion) in the first six months of 2022, according to data from Morningstar.
This contrasts with more traditional fund sectors, such as global large-cap equity or global emerging markets equity, which were down by 25 per cent and 17 per cent respectively over the same six-month period. The technology equity sector was hit even harder, with AUM tumbling by over 35 per cent in the first half of the year.
The Cerulli report said: “Inflation is a concern worldwide. Euro area annual inflation rose at a record 8.6 per cent in June, up from 8.1 per cent in May. In the UK, inflation hit a 40-year high of 9.4 per cent in June, up from 9.1 per cent the previous month. Not surprisingly, protection against inflation is currently a key objective for many investors and infrastructure assets have typically provided a hedge against rising prices, especially where companies are able to renegotiate contracts and pass through costs to customers.”
“In addition, infrastructure assets often have an explicit link to inflation via regulation or formal terms and conditions as part of agreed contracts. Investors are also attracted by the prospect of a longer-term view – commonly associated with infrastructure projects – yielding a steady source of income. This point becomes more pertinent given the recent volatility in the bond market.”
The report points out that there has been strong encouragement at the national level to boost infrastructure investment. For example, the Swiss Federal Office of Transport intends to extend its infrastructure investments in France and Italy, targeting rail lines and terminals.
Meanwhile the UK Infrastructure Bank, which launched in June 2021, is building internal capacity to make its own direct equity investments, shifting the focus away from third-party asset managers. Its strategy will focus on clean and renewable energy, in line with the UK’s ambition to reach net zero by 2050.
At EUR29.0 billion in terms of AUM, Europe’s infrastructure equity fund segment still represents a relatively small part of the overall fund industry. But Cerulli believes it will continue growing.
“Many investors in Europe are likely to seek out infrastructure assets, directly or indirectly, as a means of navigating the current environment of high uncertainty and rising inflation,” says Zumbo.
“The intersection of infrastructure and sustainability will also continue to represent a major opportunity as economies globally seek to address the need for greater investment in a greener future.”