To significant applause during his first address to a joint session of Congress, President Donald Trump said: “The time has come for a new program of national rebuilding.” He was referring to a proposed $1 trillion spending plan to revamp America’s infrastructure that would span 10 years.
The measure will be immensely difficult to implement even with Republicans fully controlling Congress, and some reports suggest infrastructure won’t be a priority until at least the end of 2018. But if the president prevails, experts agree his policies could give a lasting boost to infrastructure assets. Many analysts say these investments already have been doing fairly well in recent years despite heightened market volatility.
In the defined contribution (DC) space, infrastructure typically comes into the picture as part of asset allocation solutions including alternative assets or “real” assets. These include commodities, natural resource equities and listed real estate securities, among others. While these asset types tend to be somewhat illiquid, they can increasingly be accessed in a more liquid way by retirement investors through prepacked diversification solutions.
These assets historically have performed well when stocks and bonds have underperformed, according to a recent report by asset manager Cohen and Steers. This is attractive to investors because of widespread projections of lower returns for stocks and bonds in the coming years.
The same report indicates that between May 1991 and December 2016, a diversified real assets blend portfolio with equally weighted portions dedicated to global real estate, commodities, natural resources and listed infrastructure, would have generated a 6.9% average annualized return. The annualized total return for a typical 60/40 equity/fixed-income portfolio was 6.7%.
The stronger returns may be attributed to a real asset mix’s potential to offset underperforming factors. Despite strong returns for real assets between 1991 and 2016, the firm notes that commodities experienced a bear market from 2008 to early 2016, and that this asset class has historically been sensitive to inflation—something that will likely increase in the event that President Trump succeeds in launching an aggressive infrastructure spending plan and other pro-growth policies.
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“If we see big infrastructure spending, that will likely accelerate the rate of inflation,” agrees Rick Unser, ERISA risk management consultant, Lockton Financial Advisors. “DC plan sponsors are going to have to start thinking about how their investment menus or options respond to an inflationary environment.”
Ben Morton, SVP and one of the portfolio managers of Cohen and Steers’ infrastructure strategy, believes that listed infrastructure assets can offer their own downside protection. “When you look at listed infrastructure, what we’ve seen in the last several years is equity-like returns, but with between 200 and 300 basis points of lower volatility than equity markets and about 50% downside capture.”
He adds, “We’re at a point in time when equities have done very well, but investors are weary of fixed income given the expected trajectory of interest rates, and the fact that we’re coming out of a bull market in bonds. Investors still want access to equities but with more downside protection.”
Moreover, the Cohen study finds that real assets “generally exhibit a positive association with unexpected increases in inflation, compared with the generally undesirable impact of inflation surprises on stocks and bonds.”
Plan sponsors can access stand-alone real asset investment vehicles or multi-asset funds dedicated to real assets. Cohen and Steers finds that funds in corporate DC plans on average allocate 4% to real assets, or half as much as defined benefit (DB) plans and a third as much as public DB plans.
“There are a number of other policies that have already begun to impact infrastructure businesses. We’ve already begun to see an easing of what I describe as environmental empathy that we’ve seen over the past 12 to 18 months as it relates to pipelines under development,” Morton says.
Still, it’s important to note the scope of the president’s infrastructure spending is still shrouded in mystery and likely to see some serious opposition, particularly when it comes to increased federal spending.
“It is unclear whether Trump’s full spending package will be approved because of the mandates a lot of people got elected on, one of which was to make sure the government can pay for these initiatives,” Unser explains. And despite the strong performance of real assets in recent years, it is obviously no indication of future growth. Plan sponsors always need to understand the fundamental drivers of performance for each individual asset class in a real asset mix, evaluate their participants’ risk profiles, and determine the best proportion of their funds to devote to real assets.
Cohen and Steers research reports are available here.
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