New analysis from JP Morgan Asset Management has backed the value of core infrastructure in asset allocation, particularly for institutional investors.
In an analysis issued this week, JP Morgan AM’s head of infrastructure research, Serkan Bahceci together with Stephen Leh have pointed to the fact that institutional investors have been allocating a growing share of their portfolios to infrastructure assets — including regulated utilities, transportation and contracted power.
They said the focus had been on core investment strategies which could produce stable, forecastable cash flows through the use of prudent leverage and some combination of transparent and consistent regulatory environments, long-term contracts with credible counterparties, and mature demand profiles.
The analysis said a key benefit of core infrastructure investments was their ability to provide relatively high total returns with low correlations to traditional asset classes, such as equities, fixed income and real estate.
“Consequently, an allocation to core infrastructure may reduce the volatility of an institutional portfolio and can potentially limit the maximum drawdown during times of market stress,” it said.
The analysis said that, going forward, the authors expected the equity risk premium for core infrastructure investments to fall, regardless of changes in the cost of debt.
“Whereas equities are vulnerable to a slump in economic growth, and fixed income is vulnerable to rising rates, infrastructure has the ability to perform well in a wide range of economic environments,” they said.
