How can alternatives like infrastructure enhance diversification during volatility?

Traditional investment wisdom holds that when stocks zig, bonds zag, creating natural portfolio diversification. However, when inflation becomes the focus of investors and central banks, this relationship can break down. Though bonds have offered some protection so far this year, a 60/40 portfolio is still down 2.61%¹. Alternative assets like private infrastructure, which have low correlation to both stocks and bonds, can effectively complement a high-quality fixed income allocation, offering greater diversification in this environment.

This is particularly pertinent given recent market volatility driven by policy uncertainty in Washington D.C. Despite Wednesday’s cooler-than-expected CPI report, concerns about stagflation—where inflation rises as economic growth slows—persist. In a stagflation scenario, both stocks and bonds could be negatively impacted by higher real yields.

The challenge is intensified by the strong stock market performance over the past two years, which has left many investors under-allocated to bonds. The uncertainty around interest rates and relatively low yields from long-term bonds compared to cash make investors hesitant to rebalance their portfolios back their long-term target allocation. This reluctance means missing out on the downside protection that high-quality fixed income typically offers during stock market downturns.

This leads us to consider alternative assets, especially those with a lower correlation to a traditional 60/40 portfolio, such as real assets (including infrastructure, real estate, and transportation) and hedge funds. These asset classes have a strong track record of providing uncorrelated returns, helping to stabilize portfolio performance over time. By allocating 20% of a portfolio to an equally-weighted mix of alternative assets, creating a 50/30/20 allocation, investors achieved an annualized return of 8.6% over a 10 year period². This is higher than the 8.1% annual return from a traditional 60/40 portfolio during the same period.

Among alternative asset classes, infrastructure is particularly well suited for the current environment of inflation, uncertainty, and market volatility for several reasons:

• Stable yield: Infrastructure assets generate predictable income streams backed by long-term contracts or regulated frameworks. Infrastructure investments have returned 10-year annualized returns of 10.6% with significantly lower volatility than pubic equities².
• Inflation protection: Infrastructure investments often include built-in inflation adjustments at the level of the underlying assets, making them an effective inflation hedge and delivering returns even during a stagflation scenario.
• Essential services: Assets providing critical services tend to maintain demand regardless of economic conditions, offering stability during market turbulence. 
• Low correlation: Infrastructure returns have had an average correlation to global equities and global bonds returns of just +0.1 and -0.1, respectively³.
• Favorable mega-trends: Significant expansion in electricity infrastructure is required to enable the build out of AI-enabled data centers. This is creating both development opportunities and enhancing the value of existing assets.

The unique combination of income generation, inflation protection and low correlation to traditional assets makes private infrastructure a valuable component of portfolios during periods of heightened market uncertainty. For investors seeking to reduce portfolio volatility while maintaining attractive return potential, a strategic allocation to infrastructure could enhance diversification when it is needed most. 

¹ Figures as of March 13, 2025. Assumes constant rebalancing of a portfolio 60% invested in the S&P 500 Total Return Index and 40% invested in the Bloomberg U.S. Aggregate Total Return Index.

² 10-year annualized returns are calculated from 2014-2023.

³ Calculated in the 16 year period between 2Q2008 and 3Q2024

09es251403144758