Investors Turn to Infrastructure Equity Funds Amid Inflation Fears
July 26, 2022 — London
Europe’s indirect infrastructure sector experienced asset growth in the first half of 2022
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.
“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.
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 10.9% to €29.0 billion (US$29.4 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 25.0% and 17.0% respectively over the same six-month period. The technology equity sector, by comparison, was down 35.9% in terms of AUM.
Inflation is a concern worldwide. Euro area annual inflation rose at a record 8.6% in June, up from 8.1% in May. In the U.K., inflation hit a 40-year high of 9.4% in June, up from 9.1% 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.
There has been strong encouragement at the national level to boost infrastructure investment. The Swiss Federal Office of Transport intends to extend its infrastructure investments in France and Italy, targeting rail lines and terminals. The U.K. Infrastructure Bank, which launched in June 2021, is building internal capacity to make its own direct equity investments, shifting the onus away from third-party asset managers. Its strategy will focus on clean and renewable energy, in line with the U.K.’s ambition to reach net zero by 2050.
At €29.0 billion in terms of AUM, Europe’s infrastructure equity fund segment represents a 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.”
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