SAN FRANCISCO — Ports, toll roads and airports have been some of the hottest subclasses of the growing global infrastructure sector, according to a new report by RREEF Real Estate Research.
Total annualized return for the five years ended Dec. 31 was 33.2% from ports, 32% from toll roads and 26% from airports, according to “Performance Characteristics of Infrastructure Investments” published in August.
Analyzing performance of the UBS Global Infrastructure and Utilities index, RREEF also makes the case for a global infrastructure portfolio.
Overall returns for the year from European infrastructure investments were the highest at 58.1% followed by Australia at 31.8% and Asia-Pacific at 26.7%. The one-year return from U.S. infrastructure was slightly more than 20%.
Infrastructure is an asset class attracting more interest from institutional investors because of its long duration, steady cash flow and inflation hedging characteristics.
The $242.7 billion California Public Employees’ Retirement System, Sacramento, announced in July that it’s considering an infrastructure portfolio, and the e209 billion ($282 billion) Dutch pension plan ABP, Heerlen, the Netherlands, intends to invest 2% in this asset class by 2010.
But the relatively immature market comes with a health warning from RREEF that performance data is limited with no widely accepted benchmarks.
Listed infrastructure funds might provide investors with faster access to the asset class than direct investments, but risk-adjusted returns are lower and correlation with listed equities is higher, the report warned.
Also, infrastructure is not a homogenous asset class, so some existing indexes favor certain sectors with more publicly listed companies at the expense of other high-growth sectors that might have stronger representation among private companies.
With increased allocations to private infrastructure through unlisted or direct investments, institutional investors require greater transparency and better benchmarks, the report said. But no broadly accepted benchmark exists for unlisted infrastructure funds. Unlisted infrastructure offers higher risk-adjusted returns but investments are scarce, illiquid and can be expensive to access.
“Despite institutional interest and the emergence of a wide variety of vehicles, the characteristics of infrastructure investments and their historical performance are not yet widely understood or documented empirically,” said Asieh Mansour, RREEF managing director and chief economist and strategist, in the report.
4 sources
RREEF analyzed four sources of performance data showing the impact of index components on returns.
UBS’ Global Infrastructure and Utilities index gave an annualized return of 12.7% for the 10 years ended March 31. According to RREEF, this return is “less than private equity and public real estate but greater than hedge funds, public equity and fixed-income returns.” But because the index is composed of listed companies, it shows a high correlation with public equities, the report found.
RREEF Research commissioned Economy.com, a subsidiary of Moody’s Investors Service providing economic data, to create a listed infrastructure index for the U.S. market that provided an annualized return of 6.9% for the five years ended Dec. 31 vs. 10.6% from a U.S. index created by UBS.
According to RREEF each index, is made up of markedly different sectors. The UBS U.S. index has a high exposure to utilities, while the Economy.com benchmark is biased toward the communications sector.
However neither index has significant exposure to the transportation sector, which has performed well on a global basis. According to RREEF, the sector has minimal representation in the U.S. listed market because many assets remain in government hands and privatization is only just beginning.
An independent assessment of 19 unlisted Australian infrastructure funds showed annualized performance of 14.1% with “moderate” volatility at 5.8%, according to the RREEF report.
RREEF Research created a hypothetical index measuring the performance of European listed infrastructure operating companies to measure of “market” performance. The index returned 12.5% a year with volatility of 13.2%. The return profile placed the asset class between European bonds and equities, according to the report.
As the infrastructure industry matures, it is likely the collection of performance data will improve. This would help standardize how performance is measured and reported and make it a more accessible asset class to institutional investors, concluded RREEF.
