In this paper, we examine two issues relevant to diversification and infrastructure investment: first, we look at portfolio construction and what it means to build a “well-diversified” portfolio of unlisted infrastructure equity; second, we turn to strategic asset allocation and examine the potential diversification benefits gained by adding infrastructure to the asset classes that make up a typical portfolio.

We know from previous research that the average investor in infrastructure holds, at any one time, between five and 25 infrastructure assets. Direct investors such as Canadian and Australian pension plans tend to have stakes in just a handful of assets, while fund managers typically offer access to a larger pool, especially when they offer multiple funds. Of course, fund of funds investors are exposed to a larger number of assets, sometimes hundreds.

However, is being exposed to many infrastructure assets sufficient to guarantee better diversification? Conversely, is a portfolio of just 10 infrastructure assets necessarily under-diversified? We show that answering these questions is not as simple as counting up the assets, sectors or countries in which individual investments have been made.

We show that the “naive” approach of adding more assets, sectors and geographies is a very inefficient and expensive way to build such a portfolio. In other words, diversifying an infrastructure portfolio can seem hard, maybe even impossible, if investors remains wedded to the “more is less” (more assets mean less risk) approach to diversification.

When investing in the infrastructure asset class as a whole is not practical or even possible, then any such investments may be better understood as active bets, justified by the selection and timing of individual infrastructure deals, than as an investment in a fully-fledged asset class that should be included in the strategy of a pension plan or insurer. However, we show that achieving a well-diversified portfolio of infrastructure investments actually is possible with a limited number of bets, as long as the key risk factors found in these investments are used to build the portfolio accordingly.