First benchmarks for infrastructure

EDHEC Infrastructure Institute is releasing 384 indices covering private infrastructure equity and debt investments. We hope these results will help dissipate the confusion created by #fakeinfra.

Almost every day, asset owners are presented with new opportunities to invest in ‘infrastructure’. The appeal is always the same: yield, stability, a degree of portfolio diversification, perhaps even inflation hedging.

But that infrastructure label has been stuck on more than one tin. A serving of infrastructure can now come in many forms: from private equity funds with various horizons and mandates, to ETFs and other funds of publicly traded equities, to green bonds or infrastructure real-estate investment trusts. Many investment products may have a new infrastructure look but it is possible that they have nothing new or special to offer – just confusing repackaging.

‘Listed infrastructure’ is #fakeinfra

Listed infrastructure is a case in point. Our recent study of the (absence of) unique characteristics among 22 listed infrastructure proxies is published in a peer-reviewed journal. A key finding stands out: there is no such thing as a listed infrastructure asset class.

This study highlights the importance of discussing the existence of new asset classes in a total portfolio context. Using mechanical stock filters or industry-provided thematic indices, we conducted 176 mean-variance spanning tests – both before and after the global financial crisis – in global, US and UK markets, and found zero evidence that focusing on ‘listed infrastructure’ creates any new and persistent diversification benefits for already well-diversified investors.

It’s #fakeinfra. It’s presented to investors as an opportunity to gain exposure to something new or rare, but has, in fact, always been available; that is, it is already spanned by existing capital-market and other instruments. Today, a listed infrastructure fund is just an active equity fund with a narrow industrial focus. It is an alpha-driven product, often mislabelled as a new form of beta. It is not what investors need to better understand the potential role in their portfolio of infrastructure and real-asset investing.

#Fakeinfra looms beyond the listed equity space as well. Reporting and valuation in private equity make it difficult for investors to find the products they need. Ill-defined terminology makes this problem worse. (Is it helpful to talk of ‘core’ and ‘core+’ infrastructure assets? Unlike real estate, infrastructure is no store of value; it needs to be used to have value.)

Real results, real assets

Now, thanks to an EDHEC initiative with industry support, the growth of #fakeinfra, listed or not, may begin to abate.

The 384 indices we’re releasing – in two series of 192 indices each – show the risk-adjusted performance of hundreds of private European infrastructure equity and debt investments, going back to 2000.

Thanks to the largest database of infrastructure investment information in the world and a unique asset pricing technology designed to estimate the performance of private, highly illiquid assets such as infrastructure debt and equity, EDHEC can produce the risk-adjusted performance metrics investors and regulators need to understand private infrastructure debt and equity as asset classes.

The news is good. We find that investing in private infrastructure assets can indeed generate out-performance, diversification or better duration hedging. It can have lower value-at-risk than major market benchmarks (suggesting a better prudential treatment under Solvency-II, for example) and its Sharpe ratio can be higher than that of indices typically used as market references.

Our indices also show that while individual investments can be quite volatile, most of this volatility is project-specific; in other words, in larger, more balanced, portfolios it is diversified away. As a result, the Sharpe ratio of the infrastructure broad market index is attractive.

Today, these indices are not directly investible. However, tomorrow they will grant investors and managers access to infrastructure investment on a well-diversified basis that will make all the difference between an attractive investment opportunity and a few highly concentrated bets, which may or may not turn out well.

In a world where proper metrics have become possible and better infrastructure investment products can be imagined, #fakeinfra can become a thing of the past, and real asset investing can begin to enter adult life.

Frederic Blanc-Brude is director of the EDHEC Infrastructure Institute.