Beyond yield:
More Core and Core Plus infrastructure benefits
Beyond yield: More Core and Core Plus infrastructure benefits
Core and core plus infrastructure assets possess several well-defined characteristics that together can provide additional benefits to investors. Because many of the projects provide essential services to the markets they serve, demand and usage is generally not materially affected by rising prices, nor vulnerable to periods of economic weakness. Further, many of the contracts that govern the regulated services within the core market often contain provisions for expense and inflation adjustments. The contractual terms can help to further insulate the revenue streams of the projects and provide a hedge to investors’ portfolios during periods of rising inflation.
The combination of these features may add value beyond the sum of the parts. According to a year-end 2021 survey of infrastructure investors, core and core plus strategies were cited as providing critical diversification benefits that helped buoy portfolios and moderate overall portfolio drawdowns during the height of the global pandemic.¹ Specifically, core and core plus strategies stood out for their historic low correlation to other assets, low volatility, and predictable, often inflation-linked cash flows and yields that helped investors navigate the evolving landscape.
¹ Preqin, 2022 Global Infrastructure Report.
Notable benefits of Core and Core Plus infrastructure
Income Producer: Investment return is often comprised of multiple components, including income and/or capital appreciation. A material portion of the returns from core and core plus infrastructure assets are derived from ongoing yields. As a result, income is typically the primary return driver rather than capital appreciation.
Inflation Linkage: Core and core plus strategies exhibit a strong positive correlation to inflation. Whether determined by regulators, concession agreements, or long-term contracts, the rates charged for the usage of infrastructure assets are usually linked to inflation over the long term.
Diversification: Due to their relatively inelastic demand structures and the financial strength of underlying contracts, core and core plus returns have historically maintained relatively low correlations to many other publicly listed or private equity-type investments. For investors, adding low-correlating assets to portfolios can help offset a variety of downside risks and potential capital impairments, while preserving the lion’s share of anticipated upside potential.