Listed markets: Made to be measured
Index providers have responded to the growing interest and activity in listed infrastructure. Christopher O’Dea reports on a market waiting to be measured
Infrastructure is one of the most intriguing investment prospects for pension funds. But take-up of the asset class has been hindered by an important obstacle: a lack of performance data and benchmarks. Without an adequate benchmark, investors can struggle to determine whether any given strategy is making a contribution commensurate with its risk.
Buying shares in companies that provide essential services such as electricity, water and public transit has become an attractive option for pension funds seeking to access the long-term cash flow, and so tracking the performance of listed infrastructure has become a top priority for the investment management industry.
Data services providers are stepping up to offer new indices and benchmarks. Indices launched this year have covered ever-smaller market-cap securities, while also lowering the percentage of total revenue that a company is required to derive from infrastructure activities in order to be eligible for inclusion in the index.
“Listed infrastructure is in the early stages of development as an asset class,” says Benjamin Morton, co-portfolio manager of the Cohen & Steers Global Infrastructure Fund. As institutional interest in the sector increases, he adds, “we continue to see the creation of new indexes marketed for use as benchmarks by investors”.
Earlier this year, the London Stock Exchange launched the FTSE Global Core Infrastructure 50/50, which covers 230 issuers and about US$2.1trn (€1.9trn) in market capitalisation. According to FTSE, industry weights are adjusted semi-annually in three broad industry sectors: 50% utilities; 30% transportation, including capping of 7.5% for rail; 20% other sectors, including pipelines, satellites and telecommunication towers. Company weights within each group are adjusted in proportion to their investable market cap, and companies must derive 65% of their revenue from FTSE-defined core activity – the development, ownership, operation and/or maintenance of transportation, energy and telecommunications infrastructure.
Each generation of new index entrants helps investors more precisely define the risk premia they are targeting, and better evaluate how well managers are doing at capturing the associated returns. The new FTSE index “is an improvement”, says Duncan Hale, head of infrastructure Research at Willis Towers Watson, “just as the Brookfield index was an improvement on what we had before that”.
The latest entrant is the GPR Pure Infrastructure Index Series, from Amsterdam-based Global Property Research. The GPR Pure series includes benchmarks with exposure to continents, developed and emerging countries, the key infrastructure sectors of pipelines and storage, electricity transmission, transportation and communication, as well as master limited partnerships (MLPs).
The development of the infrastructure asset class sparked GPR, a long-standing provider of listed property benchmarks, to investigate an index for listed infrastructure, says Floris van Dorp, an analyst at Amsterdam-based GPR. “At first, the market was a little opaque, but infrastructure allocations are on the rise, especially for the listed space, and questions kept coming in from investors.”
The GPR index is “pure”, van Dorp says. To be included in the benchmark, companies must derive 50% of their revenue from infrastructure assets themselves, rather than related activities, such as mobile phone subscriptions sold by mobile tower operators. Such related services are not considered infrastructure under the GPR index rules. “We took a stance, and we feel very comfortable with our stance,” van Dorp says.
The GPR Pure Infrastructure index includes 122 issuers as of 31 July 2016, covering about $575bn in market cap, and will include companies with as little as $100m in market cap, compared with a $250m for the FTSE index and $500m for the S&P Brookfield infrastructure index. The lower market cap minimum lets the GPR index include an additional 14 companies below the $250m mark.
Another difference is that GPR includes MLPs, which are excluded by both FTSE and S&P. Van Dorp says GPR will customise the benchmark series for clients that might need to exclude MLPs or otherwise adapt the index to their portfolio characteristics.
The listed infrastructure market is at a stage of development similar to where property securities was about 15 years ago. “While real estate is very well served by data and index providers, there remain debates about what infrastructure is,” says James Wilkinson, co-global CIO for global real estate securities at BlackRock.
While that may present an opening for information services companies to create various benchmarks, it is not clear that investors see a benefit to the proliferation of indices. Most indexes represent exposures to the same businesses and companies, with benchmark composition altered by somewhat different weighting mechanisms and constraints, such as varying geographic exposure caps, different minimum market cap thresholds, and differing infrastructure revenue thresholds.
“While there are in some cases material differences between indexes in terms of the sub-sectors included, overall, index overlap is very high,” says Morton.
Academics contend that such definitional issues raise questions about whether listed infrastructure provides investors any benefit at all. In a new paper that tested the results of 22 different proxies of the “listed infrastructure asset class” defined by SIC codes, thematic indices or UK-listed PPP/PFI funds, Frederic Blanc-Brude and his colleagues at EDHEC Infrastructure Institute Singapore looked at whether listed infrastructure stocks created diversification benefits previously unavailable to large investors already active in public markets.
The researchers concluded that “the listed infrastructure asset class does not exist”, and cautioned that “benchmarking unlisted infrastructure investments with thematic, industry-based, stock indices is unlikely to be very helpful from a pure asset allocation perspective”. The problem, the EDHEC team says, is that infrastructure stock indices “do not exhibit a risk/return trade-off or betas that large investors did not have access to already”.
In other words, “any ‘listed infrastructure’ effect was already spanned by a combination of capital market instruments over the past 15 years in Global, US and UK markets”.
In fact, “defining infrastructure investments as a series of industrial sectors and/or tangible assets is fundamentally misleading”, the EDHEC research says. “We find that such asset selection schemes do not create diversification benefits, whether reference portfolios are structured by traditional asset classes or factor exposures.”
While academics may dispute the value of allocating capital to listed infrastructure, institutional investors face a practical challenge. Wilkinson notes: “Investors today need to be able to benchmark their managers.”