Income Returns of Infrastructure: Model Specification & Estimation
We examine the key components of our infrastructure equity income return models and review our model parameter estimation procedure closely.
Having experienced the first US inflationary cycle since the mid-1970s, how should investors be thinking about inflation risk and their real asset allocations going forward? Looking back over the last 100+ years, if the past is prologue, then investors may experience inflationary cycles lasting 3y a bit less than once a decade.
(1913-2024)
Note: Inflation is the rolling annualized quarterly percent change in CPI. Inflationary episodes are determined ex post as 2ppt above the trailing 4Q average, with some quarters assigned a regime using our qualitative judgement to eliminate very short, transitory episodes of high inflation. In contrast, when formulating a dynamic real asset allocation strategy, a real-time, ex ante data driven rule is used that assumes only information available in each period and includes data release lags in assessing asset performance (see below for details). Source: Bureau of Labor Statistics, Haver Analytics and PGIM IAS. Provided for illustrative purposes only.
Although US headline inflation has moderated since peaking in mid-2022, core inflation has proven sticky, and concern about inflation risk continues to trend higher along with related focus on real assets.
In speaking with institutional investors, there are three general motivations for considering the inclusion of real assets in a balanced portfolio: greater portfolio diversification, as a source of incremental returns, and as a hedge against inflation risk. Indeed, real assets returns are not highly correlated to either stock or bond returns, they tend to co-move with inflation and have relatively stronger returns when inflation is high and rising.
We explore these three motivations for adding real assets to a portfolio, each with a related portfolio construction methodology, and focus on the impact that inflationary regimes have had on portfolio performance.
(2004-2024)
Note: Trailing 6m moving average relative to full sample average. Data are Google trend “all category” US search terms. Source: Google Trends (accessed 04Dec2024) and PGIM IAS. Provided for illustrative purposes only.
(Annualized, 1971-2024)
Note: Inflationary episodes are determined ex post as 2ppt above the trailing 4Q average, with some quarters assigned a regime using our qualitative judgement to eliminate very short, transitory episodes of high inflation. In contrast, when formulating a dynamic real asset allocation strategy, a real-time, ex ante data driven rule is used that assumes only information available in each period and includes data release lags in assessing asset performance (see below for details). Source: Bloomberg, Bureau of Labor Statistics, DataStream, Haver Analytics, Standard & Poor’s, U.S. Treasury and PGIM IAS. Provided for illustrative purposes only. Past performance is no guarantee or reliable indicator of future results.
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We examine the key components of our infrastructure equity income return models and review our model parameter estimation procedure closely.
What drives infrastructure returns? We dive into returns, valuation and inflation sensitivity of infrastructure investments and compare them to public assets.
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