Blending listed and unlisted infrastructure strategies can result in diversification benefits and help achieve an optimal allocation, according to research by Simon Wilde of London’s Imperial College and the Global Listed Infrastructure Organisation (GLIO).
“We compared the financial risks and returns of listed and unlisted infrastructure, assessing the view that they are not necessarily the same at any one point in time because of the pricing methods,” says Wilde.
“We then looked at the impact of allocating capital to both vehicles for large, well-diversified investors.
”To the extent listed and unlisted infrastructure perform differently, there may be diversification benefits from having allocations to both areas.”
Australian superannuation fund UniSuper has used both listed and unlisted vehicles, allocating to specific risk profiles based on underlying assets rather than through a traditional asset class allocation approach.
Its head of property and private markets, Ken Robbins, said: “Labelling all infrastructure investments as one category of risk and return, in our view, is inappropriate.
“We are agnostic when it comes to listed versus unlisted infrastructure and property, as we do not believe being priced daily changes the underlying asset, its income stream or its risk.”
Oskar Backman, investment manager of real assets at Swedish national pension fund AP1, said: “We use the listed companies to gain exposure to infrastructure.
“We like the transparency and liquidity of the listed companies, but moreover, we are looking at gaining exposure to well managed high-quality underlying infrastructure assets.”
Proponents of listed infrastructure will be heartened by its strong outperformance; $100 (€89.4m) invested in listed infrastructure in June 2003 would have increased 12 years later to $394.
This is significantly higher than the $268 from unlisted infrastructure or $270 from global equities, $154 from bonds and $117 from risk-free assets.
Fraser Hughes, GLIO chief executive and founder, said: “We believe that unlisted and listed infrastructure go hand in hand, enabling investors to gain exposure across a diverse range of infrastructure assets.
“Any sensible allocation to infrastructure must consider all potential companies/vehicles on a ‘look-through’ basis, focusing on the quality of underlying assets, cash flows and management teams.”
The research also found listed infrastructure returns are more correlated with global equities than unlisted infrastructure, seen by their capital asset pricing model betas of 0.76 and 0.18, contributing to unlisted infrastructure having a higher capital asset pricing model alpha of 5.8%, compared to 4.9% for listed infrastructure.
However, GLIO said that, if NAVs systematically understate the true change in market value of funds’ assets, NAV volatility will also be understated, thus flattering risk-adjusted returns.
With illiquidity of unlisted infrastructure self-evident, GLIO said investors should demand an illiquidity premium not taken into account in the analysis. In addition, time-horizon-constrained investors might not be able to consider unlisted funds, or direct investing at all.
Wilde said: “The imperfect correlation of both types of infrastructure, because of the differing valuation methods, and with other asset classes, means there should be a significant diversification benefit from including a blend of infrastructure into an equity and bond portfolio.”
Based on sample data from 2003 to 2015, the study found that if an investor is targeting 10% volatility, the best possible return from not allocating to infrastructure is 7.3%. This increases to 8.7% under a 40% capped blended infrastructure allocation. An uncapped blended infrastructure allocation achieves 11%, which is comprised of around 50/50 listed and unlisted infrastructure.
Hughes said that “as the competition for direct infrastructure assets intensifies, and the amount of dry powder looking for infrastructure exposure swells, an allocation to a diversified portfolio of listed infrastructure – as part of a broader infrastructure allocation – makes perfect sense for investors looking for long-term infrastructure investment characteristics”.
