(January 19, 2012) — Different investors have different goals for their infrastructure portfolios, leaving no single “right” way to benchmark the asset class, a newly published paper asserts.
The paper — by Jagdeep Singh Bachher, deputy CIO at the Alberta Investment Management Corporation (AIMCo) who recently received an aiCIO Industry Innovation Award, Ryan J. Orr, executive director at Stanford University’s Collaboratory
for Research on Global Projects, and Daniel Settel, co-founder and vice president of operations at Zanbato Group — asserts that no standard exists for benchmarking the performance of unlisted infrastructure investments despite growing interest in the asset class.
To conduct the analysis, AIMCo conducted a three-week brainstorming, critiquing, and idea refining session, with the paper’s analysis coming from interviews with nine institutions that maintain dedicated infrastructure investment allocations, as well as a review of scholarly literature.
According to the paper, the diversity of benchmark approaches reflects a number of factors — namely the newness and heterogeneity of infrastructure, variations in risk–return expectations across institutions, and a lack of widely cited performance data for infrastructure. “Several institutions noted a desire for greater benchmark stability when selecting real return benchmarks,” the paper asserts. “Some hybrid approaches may represent an attempt to integrate more of the desired features of infrastructure investing (low volatility, inflation-linkage, cash yield, etc.) into a single composite. The diversity also reflects the fact that infrastructure investments play different roles in different investors’ portfolios.”
Furthermore, the paper maintains that despite the different allocations, institutional investors generally conclude that on the risk–return continuum, infrastructure investments fit somewhere between regular equities and fixed income.
An earlier published report by research firm bfinance offers another perspective on the growth of infrastructure investment globally, noting that pension funds have suffered as a result of a lack of understanding about leverage, timing, and pricing when it comes to investing in the asset class. According to the firm, many pension funds have experienced disappointing returns having been sold infrastructure as a bond substitute without understanding the risks associated with leverage, timing, and pricing.
“Infrastructure is a broad term, encompassing many different types of assets and deal structures. It can be accessed through bonds, private debt or private equity. On the private equity side, if cash-flows are availability-based (and assuming the sovereign counterparty is sound) rather than user-pay, held for the long term and prudently leveraged, then one might argue its position as a bond substitute,” says Vikram Aggarwal, Director, Private Markets at bfinance. “However, in general, infrastructure funds often behave in the opposite way, by holding assets for relatively short time periods, using a lot of leverage which is often in the form of short term borrowings, leaving it vulnerable to re-financing issues and real risk of capital loss.”
Related Article: Are governments coercing funds to invest, or are such funds investing on their own volition—and with their own profit in mind?