Could this quiet pocket of the market be an ASX index outperformer through inflation?

Businesses that are in the infrastructure space can diversify returns.

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Key points

  • Infrastructure can generate strong cash flows for investors
  • Transurban is a toll road operator with a growing portfolio of assets
  • Magellan Infrastructure Fund has a diversified global portfolio of infrastructure shares

The infrastructure space is an interesting area of potential opportunities for investors to look at, according to a leading fund manager.

Businesses that generate "stable long-term cash flows" could help diversify returns – that's the view of Blackrock's global head of alternatives, infrastructure and real estate, Anne Valentine Andrews. She likes infrastructure assets even with risks such as "governments imposing artificial price caps amid political pressure".

Infrastructure company earnings are "often less tied to economic cycles than corporate assets. Contracts can be long-term and span decades. And infrastructure assets can help hedge against inflation, with fixed costs and prices linked to inflation."

How could infrastructure deliver growth?

Blackrock believes there are opportunities in the infrastructure space. Andrews said:

From roads to airports and energy infrastructure, those assets are essential to industry and households alike.

Infrastructure has the potential to benefit from increased demand for capital over the long-term, powered by structural trends such as the energy crunch and digitalisation.

The fund manager also pointed to how World Bank data suggests that there's a gap of about $1.5 trillion between existing investments and what's needed to meet global infrastructure demand over coming decades.

What ASX shares could benefit?

After Sydney Airport was taken over, there are fewer options to look at, but I'll note a couple of investments that are available to investors.

Transurban Group (ASX: TCL) is a multi-country toll road operator, owner and developer. It has toll roads in Australia and North America. The business is seeing traffic recovering from COVID impacts and toll fees are increasing faster because they are linked to inflation, which is currently elevated. This in turn can boost the distribution to investors.

The business is also working on new toll roads, which can boost cash flow in future years.

Despite higher interest rates, the Transurban share price is up slightly in 2022.

Magellan Infrastructure Fund (Currency Hedged) (ASX: MICH) is a fund that invests in infrastructure shares around the world.

It's invested in various infrastructure sectors like airports, communications, toll roads, rail, energy infrastructure,  gas utilities, transmission distribution, integrated power and water utilities.

The fund is geographically diverse, with 41% invested in the USA, 27% in Europe, 13% in Asia Pacific, 12% in the UK, 2% in Canada and 5% in cash.

In terms of the actual names, these were the biggest positions in the portfolio at the end of November 2022 (in alphabetical order): American Tower Corporation, Atlas Arteria Group (ASX: ALX), Ferrovial, National Grid, Norfolk Southern Corporation, Sempra Energy, Transurban, United Utilities Group Plc, Vinci and Xcel Energy.

It has been a rough time for infrastructure shares as rising interest rates affect valuations, but the Magellan Infrastructure Fund share price has been recovering in recent months as confidence returns.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended American Tower. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended National Grid Plc. The Motley Fool Australia has recommended Magellan Infrastructure Fund. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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