Infrastructure is still finding its place in institutional portfolios with a wide disparity in allocations reflecting the novelty of the asset class, a new study has found.
According to ‘The role of infrastructure in a portfolio’ research paper published last week by Australian boutique manager Maple-Brown Abbott (MBA), both consultants and investors demonstrate “significant variance” in their strategic allocations to the asset class.
“This is to be expected as the asset class is still new and advisors are only beginning to focus on the portfolio benefits,” the MBA paper says. “Generally speaking, we find that the average allocation most investors in the asset class target [is] somewhere in the ‘mid-single digits’ percent allocation of an overall portfolio, with a typical range of between 0-15%.”
However, the MBA paper, which based its analysis on the FTSE Global Core Infrastructure 50/50 Index, concludes the emergent asset offers some unique and demonstrable benefits for portfolio investors.
“The growing interest in infrastructure as an asset class has been underpinned by having historically provided a lower volatility and a less than perfect correlation with global equities, as well as a more stable, sustainable yield that has grown at least commensurate with inflation,” the paper, authored by MBA portfolio manager Steven Kempler, says. “The qualities of global infrastructure suggests the asset class takes on characteristics that partially resembles both debt and equity, yet sits somewhere between the two on the basis of risk and reward.”
The study found global listed infrastructure (GLI) had outperformed bonds, equities and real estate investment trusts (REITS) over “multiple time periods” in both US and Australian dollar terms.
As well as providing higher total returns than broader global equities over the last three-, five- and 10-year periods, listed infrastructure experienced lower volatility, the report says.
The study also found infrastructure held up better during periods of negative share market performance than global REITS – the asset class infrastructure is commonly lumped in with.
In US dollar terms, infrastructure outperformed the broader share index in 11 of the 12 negative quarters global equities experienced from late 2007 to early 2016. REITS, however, outperformed in only six of the same 12 negative quarters, the MBA analysis says. The study measured a similar, albeit slightly weaker, relationship in Australian dollar terms.
“During quarters of weak Global Equity returns, we’ve found Global Infrastructure to perform materially better,” the report says. “This is in stark contrast to Global REITS. Whilst some may view REITS and GLI as providing a similar defensive outcome, our analysis of the data suggests they are actually quite different.”
Furthermore, the MBA paper says infrastructure has delivered stronger yields than bonds over the last four years while consistently throwing off more income than global equities during most time periods.
“As compared to only a few years ago, a decision to allocate away from bonds to infrastructure today could actually enhance total portfolio income, with the latter remaining one of a few genuine ‘yielding’ asset classes,” the report says.
“That is, infrastructure has delivered a positive real income stream over most short- and long-term periods, whilst Global Equities has only managed to do this in more recent years at benign inflation levels.”
While the MBA research focused on the listed variety, the fund manager argues infrastructure should be treated as a “single asset class” whether packaged as equities or in unlisted form.
“Infrastructure is commonly defined as being the physical structures, networks and companies that provide services essential to the basic functioning of a society and its economic productivity,” the paper says.
However, MBA invests according to its own tighter definition of infrastructure assets.
“… investors need to recognise that a tight and pure definition of infrastructure is critical to any investment process and an important consideration when selecting an infrastructure investment manager in order to achieve the often-touted benefits of the asset class,” the paper says.
After launching in 2012 the MBA Global Listed Infrastructure funds have accumulated over A$1 billion. The longstanding Australian boutique manager, founded by Robert Maple-Brown Abbott in 1984, is represented in NZ by Heathcote Investment Partners.