Academic Paper: No Single Way to Benchmark Infrastructure

Despite growing interest in infrastructure as an asset class, no standard exists for benchmarking the performance of unlisted infrastructure investments.

(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 aiCIOIndustry 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.

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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.”

(January 19, 2012) — BNY Mellon has agreed to a partial settlement with the Justice Department to change aspects of its disclosure policy relating to its foreign exchange services.

The bank agreed to disclose additional information on transaction pricing, Bloomberg BusinessWeek initially reported.

Both BNY Mellon and State Street reported earnings on Wednesday. While State Street revealed improved profits, shares declined as the bank failed to match Wall Street analyst expectations. At the same time, BNY Mellon revealed a fall in net income and lower foreign exchange volume.

“Foreign exchange and other trading revenue totaled $228 million compared with $258 million in the fourth quarter of 2010 and $200 million in the third quarter of 2011,” BNY Mellon reported in a statement. “In the fourth quarter of 2011, foreign exchange revenue totaled $183 million, a decrease of 11% year-over-year and 17% sequentially. Both decreases resulted from lower volumes. The year-over-year decrease was partially offset by higher volatility, while sequentially, volatility decreased.”

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The case against BNY Mellon is just one example of heightened scrutiny into custodial banks, as states and federal authorities increasingly allege that such banks cheated pension funds and private clients.

Read “Your Largest Unmanaged Exposure” in aiCIO‘s Summer Issue, in which Cynthia Steer, previously at Russell Investments and now Head of Manager Research & Investment Solutions at BNY Mellon, speaks on how she considers currency exposure the number one issue that plan sponsors have to deal with.