The Role of Infrastructure Investments in a Multi-Asset Portfolio – Answers from Dynamic Asset Allocation

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 determine time-varying asset allocations using a mean-variance, as well as a mean-downside risk optimization algorithm and show that infrastructure plays an important role in both models. It is allocated predominantly to portfolios that exhibit low-to-medium risk with maximum allocations of 32% and 28%, respectively. With increasing investment horizons, infrastructure is also attractive to investors who aim at earning higher returns, and especially to those who wish to protect low-expected-return portfolios from downside risk. As infrastructure and large cap stocks are highly correlated over longer investment horizons, the allocation to infrastructure is sensitive to whether large cap stocks are allocated to the portfolio. Furthermore, we find that infrastructure is not a substitute for real estate.