- Global megatrends such as digitalisation, online trading and autonomous driving require new infrastructure and real estate.
- This new generation of infrastructure is more sustainable and should have more growth potential than traditional infrastructure.
- A defensive equity investment with low correlation to other asset classes, infrastructure works well as a portfolio diversifier.
In difficult times, defensive asset classes often come into their own. Infrastructure keeps the economy running. Roads and railways, power, gas and telephone connections, seaports and airports provide the basic framework that allows people to live and work together. As a rule, building infrastructure requires considerable initial investment. In return, it should then provide operators with a stable income over many years.
The great disruption taking place in the economy applies to infrastructure too. For a long time, investors concentrated primarily on more traditional infrastructure sectors such as gas and oil pipelines, roads and telecommunications lines. However, the megatrends of digitisation and sustainability mean it’s time for a rethink.
Megatrends demand new infrastructure
"Tomorrow's infrastructure must reflect and drive social change,” says Manoj Patel, co-head of infrastructure equities at DWS in Chicago. “In the future, it will be all about connecting the world in a sustainable way.”
Megatrends are driving this development. Digitisation, for example, requires substantial investment in data storage and cloud services, new forms of data transmission such as the new 5G mobile phone standard and the Internet of Things. To slow down climate change, renewable sources of energy must be massively expanded. Healthcare must continue to be geared to the needs of ageing societies. At the same time, new life sciences promise medical breakthroughs. However, substantial initial investment and dedicated real estate close to universities and government institutions are needed to accelerate research and development further.
Manoj Patel and his team have identified six trends that will shape the next generation of infrastructure and real estate investment in the future. In addition to the trends of digitalisation, environment and healthcare already mentioned, the fund manager considers electrification, online trading and transport to be promising trends. Smart grids and new forms of energy storage are increasingly replacing conventional centralised supply networks. The boom in online sales requires major investment in warehousing real estate, and sustainable transport and delivery systems. In the transport sector, conventional cars and lorries are likely to be gradually replaced by self-propelled technologies and automatic traffic guidance systems.
Tomorrow’s infrastructure is sustainable
In this model, traditional infrastructure is just the base on which the next generation will be built. Infrastructure for using fossil fuels such as oil and gas is likely to be gradually replaced by renewable energy. Even today, implementation of the energy turnaround in Germany means new power lines must be constructed to transport electricity from offshore wind farms in the north to the heavily industrialised south of the country, where demand is greatest. In future, we will no longer be able to address the problem of ever-increasing traffic primarily by building new roads. Instead, the traffic of the future looks set to rely on intelligent solutions that will enable roads and railways to be used much more efficiently than today.
"Next-generation infrastructure opens up investment opportunities in promising tangible assets that can stabilise investors’ portfolios in economically turbulent times and make a valuable contribution to increasing sustainability," says Manoj Patel.
Tomorrow's infrastructure must reflect and drive social change.
Investment in infrastructure and next-generation real estate fits well into sustainable portfolios.
With DWS Invest ESG Next Generation Infrastructure, Manoj Patel's team has created a fund that invests specifically in next-generation infrastructure and related real estate stocks. Alongside future viability, the second key criterion is sustainability. "In most cases, these criteria go hand in hand: investment in modern infrastructure projects is almost always also an investment in greater sustainability," says the fund manager.
ESG criteria under the microscope
Despite this, Manoj Patel carries out intensive checks on every investment to ensure it complies with DWS's high ESG standards before buying it. Only company shares that pass the strict test are shortlisted for the portfolio.
The result is a portfolio of 30 to 50 shares in quality companies from the infrastructure and real estate sectors that were able to impress the fund management team with their balance sheets and distributions that are comparatively easy to calculate. In addition, companies should offer good growth prospects and be well positioned with regard to the multi-faceted topic of sustainability.
Potential investors must nevertheless be aware that an investment in an infrastructure equity fund involves traditional equity-investment risks: market, sector and company-related share price drops are always a possibility. In addition, as the recent Coronavirus pandemic clearly shows, trends can change quickly and so can an investment’s prospects for success.