Art by OYOW
Investors are flocking to infrastructure and real assets for their similarities to fixed income and the diversification they can bring to a fixed-income portfolio.
“While fixed income can often play a critical role in portfolio construction, the addition of asset classes such as infrastructure and real assets can provide significant diversification benefits,” says Ken Shepard, head of specialty asset management at Bank of America.
Over the past decade, according to a recent report from Boston Consulting Group, infrastructure assets under management quadrupled, to a high of $1.3 trillion, as of June 2024.
“Infrastructure remains a cornerstone of private investment strategies, offering stability and inflation protection in volatile markets,” said Wilhelm Schmundt, senior partner and managing director at BCG, in a statement. “As investors adjust to a maturing market, we see significant opportunities emerging in energy transition, digital infrastructure, and new investment structures designed to attract capital.”
Infrastructure is expected to be a good fit for the economic volatility that threatens to continue for the remainder of the year.
“In our view, infrastructure returns are likely to be in the 11-12% range next year, which is above their long-term average, but consistent with what the asset class has achieved in prior periods in which interest rates were falling and GDP growth accelerating,” Macquarie Asset Management stated in its 2025 outlook.
Real assets such as timberland and farmland, Shepard says, can provide significant diversification benefits because they exhibit very low correlation to investment-grade fixed income.
“While unexpected inflation may cause interest rates to rise, potentially devaluing existing fixed-income holdings, timberland has long functioned as an excellent inflation hedge,” Shepard says. “Trees grow, regardless of market conditions, appreciating in both volume and value, which helps timberland retain its appeal during periods of economic uncertainty.”
A white paper from PGIM noted that institutional investors like real assets because of three main characteristics it offers: diversification, return enhancement and inflation hedging.
The paper noted that, relative to a stock/bond benchmark, portfolios that hold real assets have performed well during periods of rising and high inflation, but the same assets can be a drag on portfolio performance outside of these periods.
PGIM suggested a dynamic real asset allocation strategy, in which an investor allocates to the asset class only when inflation is high and rising, which, the firm wrote, can generate positive returns during these periods, while foregoing periods of underperformance.
AI Infrastructure, Energy Transition
Hyperscalers—the companies such as Meta, Google and Amazon that are building large-scale data centers—and infrastructure managers are set to invest hundreds of billions of dollars into data centers and other infrastructure for both the artificial intelligence boom and the transition away from fossil fuels.
According to market research firm Dell’Oro Group, global capital expenditures for AI data centers and related infrastructure reached $455 billion last year, a 51% increase from 2023.
“There’s going to be a lot of demand for infrastructure,” says Anders Persson, Nuveen’s CIO of fixed income. “If you think about the AI push that we’re seeing, that is resulting in more need for bandwidth for data centers. That filters into utilities and infrastructure support more broadly.”
According to a white paper from the BlackRock Investment Institute, energy investments in the U.S. are set to increase annually to $3.5 trillion by the end of the decade and $4.5 trillion in the 2040s from its current level of $2.2 trillion.
Related Stories:
 | With Interest Rates Elevated, It’s Time for Fixed Income |
 | Is the Shine Coming Off of Private Credit’s ‘Golden Age’? |
 | Investors Move More Into Alts Following Stock Surge |
Tags: Anders Persson, Fixed-Income, Infrastructure, Macquarie Asset Management, Nuveen, Real Assets
