Long-Term U.S. Infrastructure Returns and Portfolio Selection

Abstract

Industry professionals wish to understand the long-term return behaviour and portfolio characteristics of infrastructure investments, however, there is a relatively short history of empirical data. There is also a paucity of research in regards to the application of finance theory and how it relates to infrastructure investments. This research employs a procedure that constructs monthly U.S. infrastructure returns over the long-term from 1927 to 2010. We employ the Carhart (1997) framework and reveal that low market beta and the value risk premia explains U.S. infrastructure returns. The research also finds that some infrastructure indices (ie. the MSCI U.S. Infrastructure index) are undesirable in a portfolio selection framework while others (ie. the MSCI U.S. Broad and Small Utilities indices) exhibit promising return, risk and portfolio diversification benefits. The findings also reveal that U.S. infrastructure index returns suffer from larger extreme left tail-risk over the long-term in comparison to what has been experienced by investors from recent empirical returns. Overall, the findings reveal that the investment merits of U.S. infrastructure are mixed. This research provides a first glimpse of U.S. infrastructure over the long-term and lays the foundation for the assessment of infrastructure in other countries.