INFRASTRUCTURE FUNDS IN A DIVERSIFIED PORTFOLIO: A CASE STUDY OF SELECTED INFRASTRUCTURE AND SECTOR-SPECIFIC FUNDS

Abstract

In recent years, infrastructure has gained significant investment importance, witnessing a surge in both listed and unlisted infrastructure funds coupled with a growing interest as an alternative asset class. The appeal lies in its potential to provide inflation-hedging and diversification benefits to investor portfolios, owing to its unique economic characteristics. Given the recent global economic turbulence, this study aims to evaluate whether listed infrastructure and its sector-specific funds can continue to serve as effective inflation hedges while enhancing portfolio diversification. Though infrastructure is theoretically perceived to offer inflation protection, past empirical literature on listed infrastructure investments does not seem to support this belief. Consequently, the hypothesis for this study is that listed infrastructure and its sectors will not provide a reliable hedge against inflation but can still offer valuable diversification benefits. To investigate this, a case study methodology was employed involving a sample of five United States (U.S.) infrastructure and sector-specific Exchange Traded Funds (ETFs), which were compared against the U.S. inflation rate and four other asset classes from 1st July 2018 to 31st December 2022. Risk-return and correlation analyses were then performed to assess the effectiveness of incorporating infrastructure and its sectors in investment portfolios. The results indicate that the selected ETFs do not exhibit strong inflation-hedging properties. However, they demonstrated distinctive risk-return profiles and generally lacked significant correlations with bonds and gold, implying promising diversification opportunities. Nonetheless, since this case study is specific to the U.S. market, the conclusions may vary when applied to other markets.