Abstract
This study examines the portfolio-diversification benefits of listed infrastructure stocks. We employ three different definitions of listed infrastructure and tests of mean–variance spanning. The evidence shows that viewing infrastructure as an asset class is misguided. We employ different schemes of infrastructure asset selection (both traditional asset classes and factor exposures) and discover that they do not provide portfolio-diversification benefits to existing asset allocation choices. We also find that defining and selecting infrastructure investments by business model as opposed to industrial sectors can reveal a very different investment profile, albeit one that improves the mean–variance efficient frontier since the global financial crisis. This study provides new insights into defining and benchmarking infrastructure equity investments in general, as well as into the extent to which public markets can be used to proxy the risk-adjusted performance of privately held infrastructure investments.
Highlights
In this paper, we ask the question: Does focusing on listed infrastructure stocks create diversification benefits previously unavailable to large investors already active in public markets?
Index providers have created dedicated indices focusing on this theme and a number of active managers propose to invest in listed infrastructure arguing that it constitutes an asset class in its own right and is worthy of an individual allocation; 3
The existence of a distinctive listed infrastructure effect in investors’ portfolios would support these views. If this effect cannot be found, there is little to expect from listed infrastructure equity from an asset allocation perspective and maybe even less to learn from public markets about the expected performance of unlisted infrastructure investments
Summary
We ask the question: Does focusing on listed infrastructure stocks create diversification benefits previously unavailable to large investors already active in public markets?. The value of these investments is expected to be mostly determined by income streams extending far into the future and should be less impacted by current events, suggesting a degree of downside protection According to this narrative, infrastructure investments may provide diversification benefits to investors since they are expected to exhibit low return covariance with other financial assets. The existence of a distinctive listed infrastructure effect in investors’ portfolios would support these views If this effect cannot be found, there is little to expect from listed infrastructure equity from an asset allocation (risk/reward optimization) perspective and maybe even less to learn from public markets about the expected performance of unlisted infrastructure investments
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