Is Infrastructure a Poor Inflation Hedge?

Institutional investors that have looked to infrastructure as a hedge against inflation may be in for a surprise, two academics suggest.

(June 29, 2012) — The widespread belief that infrastructure offers a good inflation hedge may be a popular misconception, an article published in the summer issue of the Journal of Alternative Investments asserts.

“Infrastructure overall as well as its subsectors telecommunication, transport, and utilities hedge inflation neither particularly well nor any better than equities,” write Maximilian Rödel and Cristoph Rothballer of the Technische Universität München, Germany. “Only portfolios of infrastructure firms with high pricing power exhibit a slightly superior (yet not statistically significant) hedging quality at a five-year investment horizon.”

The German academics analyzed literature on the subject and conducted their own empirical study, which they said was the first to be done in a “comprehensive and methodologically robust” way. By and large, they conclude, infrastructure provides the same (inadequate) inflation hedge as equities. Only carefully selected infrastructure assets with strong pricing power give a somewhat credible hedge against inflation. Consequently, investors should “depart from the belief that infrastructure generally provides a natural hedge,” Rödel and Rothballer contend.

Large institutional investors, particularly pension funds, have gravitated toward infrastructure investments because they generate strong and stable cash flows. Part of their allure, however, has been their supposed hedge against inflation. While inflationary pressures are low despite rock-bottom interest rates, concerns persist about inflation in the medium-term. The conclusion of the academics’ article may spark a reexamination of the alternative investment as a result.

To read “Infrastructure as Hedge against Inflation—Fact or Fantasy?” by Maximilian Rödel and Cristoph Rothballer, click here.

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