Infrastructure Investments in a Multi-Asset Portfolio – A Drawdown Risk Perspective

Abstract

This paper investigates the role of direct infrastructure investments in a multi-asset portfolio, by employing a US transaction-based index which covers the period Q2 1990 to Q2 2010. We use an algorithm which minimizes Conditional Drawdown at Risk (CDaR) to determine time-varying asset allocations. In addition to infrastructure, the asset menu comprises large and small cap stocks, bonds of different maturities and cash. Our results show that infrastructure plays an important role and is allocated predominantly to portfolios that exhibit low-to-medium risk exposure. We cannot find any evidence that infrastructure provides a hedge against pension liabilities, but it is a viable asset when various predefined target returns are the reference point for evaluating portfolio risk and performance. We also find that infrastructure is a hedge against systematic equity-market downside risk and adds value to a portfolio which is designed to protect an investor against a decline in portfolio value when the equity market drops.