Private markets are unable to support investors’ growing allocations to infrastructure, necessitating a reconsideration of listed investments, according to Cohen & Steers.
In a recent paper, the listed real assets specialist argues that investors can avoid a “backlog of capital” attempting to enter the private infrastructure market while also benefiting from greater liquidity.
It states: “As more capital enters the market, investors are struggling to achieve their target allocations due to rising asset values and growing competition to place capital.”
Authors Robert Becker and Benjamin Morton argue: “By complementing private investments with listed infrastructure, we believe investors can improve implementation, while gaining strategic benefits such as greater flexibility in portfolio management and the potential for enhanced returns.”
The Cohen & Steers portfolio managers also state that listed infrastructure could help buffer portfolios in periods when inflation comes as a surprise.
In unexpected inflation scenarios – when inflation is 100bps higher than predicted the previous year – listed infrastructure outperforms its historical average by 200bps.
This outperformance can be compared with stocks and bonds, which “delivered inflation-adjusted returns 190 and 40 basis points below average, respectively,” according to the research.
Morton told IP Real Estate: “Historically, we have seen attractive risk-adjusted returns and participation in the upside despite modest underperformance. But investors really get the benefit on the downside.”
In the 10 years up to the end of May this year, the UBS Global 50/50 Infrastructure & Utilities Index typically provided 93% of the gains of the MSCI World Index during months when the broad market had a positive total return. “However, when the broad market declined, infrastructure captured only 74% of the declines on average,” the report said.
The arguments in favour of combing listed infrastructure with private funds and direct investments mirrors earlier assertions made by Cohen & Steers in the real estate sector. The investment manager has long argued that investors should use listed markets to build a core property portfolio and supplement this with higher-return private real estate strategies.
Partners Group, which describes itself as a “private markets investment manager” has been seeking to increase the profile of its listed infrastructure business.
Markus Pimpl, senior vice president at Partners Group, told IP Real Estate that the listed infrastructure arm, which manages a €395m global fund, was created in 2006 following requests for more liquid solutions from its private infrastructure clients.
He said some investors were investing in both listed and private infrastructure.