Investors can turn to infrastructure when looking for steady returns from a low-correlation asset class.
Yet, contrary to popular belief, infrastructure is a good diversifier only under certain conditions, says David Wong, managing director, Investment Management Research at CIBC Asset Management.
“Studies have shown that listed infrastructure has struggled to be truly differentiated,” he says. “It’s pretty hard for a subset of something broader, in this case infrastructure being a subset of broader equities, to provide those differentiating qualities unless we are very clear about what we want from the components in the first place.”
Nonetheless, money has flocked to the asset class over the last 10 years: the eVestment infrastructure universe has increased from six offerings at the end of 2007, representing about US$3 billion in assets, to 36 products at the end of 2016, worth about US$78 billion.
“Part of the appeal of listed infrastructure has been the notion that everyday investors can mimic the strategies of large, sophisticated pension plans that have moved to real assets to better match their liabilities,” Wong says. But he points out that “large pension plans are typically allocating to private infrastructure investments, [which] don’t face the daily volatility associated with listed infrastructure.”
So it’s difficult to replicate an institutional investment style; after all, listed investments are still equities, “and much of their returns can be explained by the stock market,” says Wong.
What’s in a name?
Another challenge of listed infrastructure investing is the terminology isn’t well-defined. “Simply labelling a product as infrastructure doesn’t necessarily correspond to a universally agreed-upon definition,” Wong says.
Even benchmarks differ. Some infrastructure indexes include railway stocks, while others don’t. Another example: “The difference in oil and gas exposure across the various infrastructure benchmarks can range from the low teens to close to 50% at the high end.”
Other factors that may vary by benchmark include stock selection and country exposure — “some indexes have rules that force the amount of emerging market exposure,” Wong points out.
As a result, cyclical exposure and volatility in the various infrastructure benchmarks can be wide-ranging. These differences “can have a dominant impact on outcomes, and make infrastructure products more like broad global equities instead of a unique asset class,” he says.
The solution? Carefully define infrastructure and invest only in companies that meet that definition, regardless of how they’re labelled. Next week, Wong will dig deeper into analyzing and choosing infrastructure investments.