The infrastructure sector has proven itself as an attractive asset class by providing diversification and strong returns. We believe that infrastructure will continue to provide strong returns and play an important role in investors' portfolios.
However, the record fundraising in the sector has also led to an increasingly competitive market, fuelling rising valuations.
In our view, these inflows have also contributed to a change in investment strategies. The sector has become more focused on non-core strategies, many of which rely on capital growth to meet return targets. We believe that these strategies are more highly correlated to other private and public equities, meaning that investors will lose some of the portfolio benefits of investing in infrastructure.
There are warning signs that we are late in the cycle: managers are adopting riskier strategies and valuations look expensive by historical standards. However, we believe that some of the uplift in valuations can be justified by a lower rates environment. Additionally infrastructure still provides a significant premium over risk-free rates and looks attractive relative to other private asset classes.
These nuanced arguments highlight the risks around calling peak valuations with some worrying signals offset by other credible mitigating factors. So, while we can't pinpoint where we are in the cycle, we believe that if there is a market correction, income strategies would outperform capital-driven strategies as the income from stable infrastructure assets will continue delivering returns for investors.