Historical performance and cash flow characteristics differ enormously among infrastructure asset sectors, and even between assets of the same sector, says the vice president of PGIM IAS’ private assets research program. But scarcity of data makes infrastructure performance notoriously hard to study.
As asset owners increasingly look to infrastructure investments for stable cash flow and diversification in a low interest rate environment, they need to better understand the wide variation in performance between sectors and business models, says an expert at PGIM, the global investment management business of Prudential Financial.
Junying Shen, vice president and co-head of the private assets research program in the Institutional Advisory & Solutions (IAS) group at PGIM, said IAS research indeed found infrastructure equity assets show only moderate correlation with public debt and low correlation with public equity. Conversely, infrastructure debt assets are highly correlated with public debt.
Speaking on a podcast for Market Narratives with Amanda White, the editor of Top1000funds.com, Shen said both infrastructure funds and direct infrastructure assets were found to perform resiliently during periods of public market volatility.
While public equity and high-yield credit declined on average around 10 per cent and 5.5 per cent respectively during times of volatility, infrastructure equity assets rose by 2.4 per cent on average, while infrastructure debt assets and infrastructure funds both had only moderate losses of around 1 per cent.
Digging deeper into the pooled performance of infrastructure asset bonds, IAS found a large variation in the risk return profiles of different sectors within infrastructure equity. Annualised total returns for the last 10y ranged from 13 per cent for the mature traditional power generation sector, to 6 per cent for gas pipelines.
There was also a large dispersion of dividend payouts from infrastructure equity investments by sector and development stage. Investors in an established network utilities company could expect to receive dividend payments from the beginning of the investment, while a greenfield solar project may not receive dividends in initial years and may only begin to receive positive and rising cash inflows as the project matures.
Shen advised investors not to assume performance and risk based on an asset class, as there exists significant idiosyncratic risk between individual assets.
“Investing in just one or two infrastructure projects will probably fail to capture the cash flow characteristics of all of the pooled infrastructure, equity and debt sets,” Shen said. “But on the other hand, the closed-end fund vehicle allows investors to at least diversify their infrastructure investment exposure through a full spectrum of strategies, including core, core plus, opportunistic, green energy, region specific and niche strategy.”
Gathering data for this research is time-consuming and cumbersome due to the lack of data around infrastructure investments, Shen said, with assets valued infrequently and most private asset data providers reporting performance measures based on fund manager appraisal valuations which may not reflect fair market value.
Shen has a focus on quantitative research related to traditional and alternative assets, and the development of asset allocation models. Cash flow characteristics are particularly important in modelling infrastructure investments into a portfolio allocation framework that integrates liquidity measurement, she said.
IAS research will next delve into portfolio allocation and how performance and risk profiles shift with the inclusion of infrastructure investments.