Baseball Hall of Famer Mike Schmidt built a career on power hitting while fellow Hall of Famer Ty Cobb operated as a deadball era contact hitter, yet both are considered among the best hitters of all time. Using baseball as an analogy, investing doesn’t always mean swinging for the fences; consistently hitting singles and doubles over a storied career can still generate a trip to Cooperstown. When discussing asset allocation with clients, our goal is to construct portfolios with long-term durability — not attempting to be the hero hitting a game-winning homerun. As actor Art LaFleur said as “The Babe” (Babe Ruth) in the 1990s film The Sandlot, “Remember kid, there’s heroes and there’s legends. Heroes get remembered, but legends never die.” We prefer our portfolios be of the “legend” variety.
This philosophy means constructing a portfolio that acknowledges the cyclical nature of markets and is clear about the longer-term return potential of the asset classes in which one is invested. Today, economic fundamentals and financial markets tell different stories. The economic fundamentals suggest the global economy is in the economic recovery stage following the unprecedented and devastating impacts from the COVID-19 pandemic. The markets, on the other hand, have recovered swiftly from the sharp declines across risk assets during the first quarter of 2020. Valuations across most assets remain elevated, fueled by record levels of fiscal stimulus and unprecedented monetary policy support. With numerous cross-currents driving the market narrative, we think market volatility is likely to remain elevated by historical standards and for an extended period of time, until the path forward for COVID-19 becomes clearer.
As many yield-seeking investors look for investments that can help achieve their long-term return objectives, we think infrastructure may be compelling. Although infrastructure is a relatively new investment solution for many U.S. investors, asset flows into the asset class suggest demand is far from outpacing the supply of global projects. Furthermore, projects dedicated to clean energy and water provide a unique opportunity to act as both a long-term income-generating asset and an impact investment to help potentially fulfill the needs of investors interested in responsible investing — a win-win, in our view.
Where can you find crumbling bridges, electrical brownouts, and multiyear water shortages? Believe it or not, the answer is the United States! The largest economy in the world has a glaring infrastructure investment gap estimated by the ASCE at $2 trillion over the next 10 years. The quality of existing public works will likely continue to deteriorate unless significant capital investments are made.
For U.S. investors, it is common to associate infrastructure with “shovel-ready” jobs, traditionally funded by various taxing authorities at the state and local levels. In 2017, for example, state and local government spent $342 billion on transportation and water infrastructure, compared with $98 billion spent by the federal government. The CBO estimates that public-private partnerships have accounted for just 1-3% of spending for highway, transit, and water since 1990. From an international perspective, however, the dynamic between private enterprise and government-funded infrastructure operations is quite different. Efforts are being made to shift the funding landscape toward the international model. As more infrastructure projects worldwide are funded by private capital, or existing infrastructure is privatized, the opportunity set for investors will likely continue to expand.[1]
As many yield-seeking investors look for investments that can help achieve their long-term, return objectives, we think infrastructure may be compelling. Although infrastructure is a relatively new investment solution for many U.S. investors, asset flows into the asset class suggest demand is far from outpacing the supply of global projects. Furthermore, projects dedicated to clean energy and water provide a unique opportunity to act as both a long-term, income-generating asset and an impact investment to help potentially fulfill the needs of investors interested in responsible investing — a win-win, in our view.
