EDHEC Infrastructure Institute-Singapore (EDHECinfra) shows that the booming listed infrastructure sector is based on a “fallacy of composition.”
For the past fifteen years, infrastructure investment has been the preserve of large sophisticated investors but is now rapidly becoming more mainstream and asset owners of all sizes are considering investing in infrastructure. In this context, "listed infrastructure" has grown from a handful to more than one hundred different products in less than a decade, adding up to USD50bn and claiming an investment universe of USD2Tn.
Listed infrastructure is typically presented as an investment with an attractive risk/reward profile and that can improve portfolio diversification.
EDHECinfra tested this proposition and shows that:
- 21 different indices of listed infrastructure stocks have equivalent or higher risk than the relevant market index, with which they are all highly correlated;
- Adding any of these 21 proxies to an investor’s asset mix has no discernible effect on their mean-variance efficient frontier over the past 15 years. In other words, it does not create any diversification benefits;
- Listed infrastructure is fully “spanned” by existing asset classes or risk factors i.e. it is 100% replicable using assets or strategies that investors already have.
The study tests for such effects in global, US and UK markets, going back 15 years and also for any persistence before and after the global financial crisis of 2008.
Co-author and EDHECinfra Director, Dr Frédéric Blanc-Brude said: “the results clearly show that what is typically referred to as `listed infrastructure’ is neither an asset class, nor a unique combination of market factors and cannot be used as an adequate benchmark of private infrastructure investments.”
“Private infrastructure entities have unique characteristics but as of today these are simply not available through the stock market”, he said.
