Strategic Asset Allocation with Unlisted Infrastructure. EDHECinfra Use Case Series

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Strategic Asset Allocation with Unlisted Infrastructure. EDHECinfra Use Case Series

2 minutes
February 23, 2021 12:10 pm

New Data Highlights the Role of Infrastructure in Multi-Asset Portfolios

Latest benchmark data shows that unlisted infrastructure equity and debt could play a significant role in institutional portfolios with as much as 10% of the global portfolio.

A new EDHECinfra paper entitled “Strategic Asset Allocation with Unlisted Infrastructure – Better Data for Sensible Results” shows the importance of benchmark selection for investors who want to include the infrastructure asset class in their strategic allocation.

For years, the OECD has reported low allocations to infrastructure of 2% on average for large pension plans, suggesting that private capital is not about to plug the ‘infrastructure investment gap’ often lamented by the G20 and other international bodies. This new research suggests that with the right benchmarks data, allocations could be five times higher.

The paper argues that investors have been using the wrong data to assess the role of unlisted infrastructure investments in their global allocation. It shows that using listed proxies and appraisal-based indices as policy benchmarks leaves investors none the wiser about the strategic role of unlisted infrastructure: listed proxies are perfectly correlated with stocks, and listed infrastructure is therefore not a separate asset class. Likewise, appraisal indices rely on stale net asset values that do not reflect market prices, are not correlated with anything and cannot be used to perform a serious asset allocation exercise. We show that unsmoothing appraisals only makes the problem worse.

Instead, using data that reflects the evolution of asset prices yields convincing results. Using the infra300® index, which captures the fair market value of 300 infrastructure companies in more than 20 countries, suggests that unlisted infrastructure equity could account for as much as 10% of the portfolio of yield-seeking investors. Likewise, using a broad market index of infrastructure debt, the paper finds significant allocations to infra debt for liability-driven investors.

“Most investors are under-invested in this asset class because they lacked robust data showing the potential of infrastructure equity and debt in the total portfolio,” says Frédéric Blanc-Brude, one of the co-authors of the report. “Thanks to recent advances in data collection and asset pricing technology, they can now answer long-standing questions about why and how they should invest in infrastructure.”

“In this paper, we conduct multiple robustness tests of the quality of the data on the role of infrastructure in the portfolio. The infra300 index data is not smoothed, exhibits meaningful correlations with other classes and is representative of the investible universe. Now we can show that infrastructure improves the risk-adjusted returns of a multi-asset portfolio without using arbitrary or binding constraints,” adds Abhishek Gupta, another co-author of the paper.

The paper also shows that investors can improve the quality of their asset allocation by using granular data that matches their exposures to different infrastructure sub-segments, each of which corresponds to very different types of investments and risk exposures.

“For investors just starting to consider infrastructure as an asset class, these insights can make a significant difference. For existing infrastructure investors, it is the opportunity to revisit and adjust their allocation to this important asset class,” concludes Blanc-Brude, Director of EDHECinfra.

The paper is available here.