Looking for a listed infrastructure asset class: Mean-variance spanning tests of 22 listed infrastructure proxies

Frederic Blanc-Brude
Tim Whittaker
Simon Wilde

In this paper, we ask the question: does focusing on listed infrastructure stocks create diversification benefits previously unavailable to large investors already active in public markets?

Paper highlights

  • We test 22 different proxies of the “listed infrastructure asset class” defined by SIC codes, thematic indices or UK-listed PPP/PFI funds
  • We use tests of “mean-variance spanning” to discover the diversification benefits of portfolios of infrastructure stocks under different definitions for a well-diversified investor
  • We use reference portfolios built with either asset class or factors and test for persistence before and after the GFC
  • We find virtually no evidence of diversification benefits from listed infrastructure, which is already “spanned” by combinations of capital market securities, alternative asset classes and/or classic factor exposures.
  • Only under the contract-based definition of infrastructure investment (as opposed to industrial sectors) does the potential to improve the mean-variance efficient frontier of a large well-diversified investor appear to be persistent post-GFC.
  • In general, we conclude that the listed infrastructure asset class does not exist.
  • In line with previous research, we also conclude that “finding infrastructure” with appealing investment characteristics, listed or not, strongly depends on how it is defined and that industrial sectors do not capture the fundamentals of infrastructure investing well.
  • This paper also provides insights into the question of defining and benchmarking infrastructure equity investments in general and to what extent public stock markets can be used to proxy the risk-adjusted performance of privately-held infrastructure investments.

Executive Summary

In this paper, we ask the question: does focusing on listed infrastructure stocks create diversification benefits previously unavailable to large investors already active in public markets?

This question arises from what we call the “infrastructure investment narrative”: (Blanc-Brude 2013), a set of investment beliefs commonly held by investors about the investment characteristics of infrastructure assets.

According to this narrative, the “infrastructure asset class” is less exposed to the business cycle because of the low price-elasticity of infrastructure services. Furthermore, the value of these investment is expected to be mostly determined by income streams extending far into the future, and should thus be less impacted by current events.

According to this intuition, listed infrastructure may provide diversification benefits to investors since they are expected to exhibit low return covariance with other financial assets. In other words, listed infrastructure is expected to exhibit sufficiently unique characteristics to be considered an “asset class” in its own right.

Empirically, there are at least three reasons why this view requires further examination:

  1. Most existing research on infrastructure has used public equity markets to infer findings for the whole infrastructure investment universe, but robust and conclusive evidence is not forthcoming in existing papers;

  2. Index providers have created dedicated indices focusing on this theme and a number of active managers propose to invest in “listed infrastructure” arguing that it does indeed constitute a unique asset class;

  3. Listed infrastructure stocks are often used by investors to proxy investments in privately held (unlisted) infrastructure equity, but the adequacy of such proxies remains untested.

The existence of a distinctive listed infrastructure effect in investors’ portfolio would support these views. In the negative, if this effect cannot be found, there is little to expect from listed infrastructure equity from an asset allocation (risk/reward optimisation) perspective and maybe even less to learn from public markets about the expected performance of unlisted infrastructure investments.

There is no listed infrastructure asset class

We test the impact of adding 22 different proxies of “listed infrastructure” to the portfolio of a well-diversified investor using mean-variance spanning tests. We focus on three definitions of “listed infrastructure” as an asset selection scheme:

  1. A “naïve”, rule-based filtering of stocks based on industrial sector classifications and percentage income generated from pre-defined infrastructure sectors (nine proxies);

  2. Existing listed infrastructure indices designed and maintained by index providers (twelve proxies);

  3. A basket of stocks offering a pure exposure to several hundred underlying projects that correspond to a well-known form of infrastructure investment defined – in contrast with the two previous cases – in terms of long-term public-private contracts, not industrial sectors (one proxy).

Employing the mean-variance spanning tests originally described by Huberman and Kandel (1987) and Kan and Zhou (2012), we test the diversification benefits of these proxies of the listed infrastructure effect.

Some stylised findings include:

  1. Our 22 tests of listed infrastructure reveal little to no robust evidence of a “listed infrastructure asset class” that was not already spanned by a combination of capital market instruments and alternatives, or by a factor-based asset allocation;

  2. The majority of test portfolios that improve the mean-variance efficient frontier before the GFC fail to repeat this feat post-GFC. There is no evidence of persistent diversification benefits;

  3. Of the 22 test portfolios used, only four manage to improve on a typical asset allocation defined either by traditional asset class or by factor exposure after the GFC and only one is not already spanned both pre- and post-GFC;

  4. Building baskets of stocks on the basis of their SIC code and sector-derived income fails generate a convincing exposure to a new asset class.

  5. Hence, benchmarking unlisted infrastructure investments with thematic (industry-based) stock indices is unlikely to be very helpful from a pure asset allocation perspective i.e. the latter do not exhibit a risk/return trade-off or betas that large investors did not have access to already.

Overall, we do not find persistent evidence to support the claims that listed infrastructure is an asset class. In other words, any “listed infrastructure” effect was already spanned by a combination of capital market instruments over the past 15 years in Global, US and UK markets.

We show that defining infrastructure investments as a series of industrial sectors and/or tangible assets is fundamentally misleading. We find that such asset selection schemes do not create diversification benefits, whether reference portfolios are structured by traditional asset classes or factor exposures.

We conclude that in general, what is typically referred to as listed infrastructure, defined by SIC code and industrial sector, is not an asset class or a unique combination of market factors, but instead cannot be persistently distinguished from existing exposures in investors’ portfolios, and that expecting the emergence of a new or unique “infrastructure asset class” by focusing on public equities selected on the basis of industrial sectors is misguided.

Figures to the right/below provide an illustration of these results in the case of the FTSE Macquarie Listed Infrastructure Index for the U.S. market.

Thus, asset owners and managers who use the common “listed infrastructure” proxies to benchmark private infrastructure investments are either misrepresenting (probably over-estimating) the beta of private infrastructure, and usually have to include various “add-ons” to such approaches, making them completely ad hoc and unscientific.

Defining infrastructure differently

Our tests also tentatively suggest a more promising avenue to “find infrastructure” in the public equity space: focusing on underlying contractual or governance structures that tend to maximise dividend payout and pay dividends with great regularity, such as the public-private partnerships (PPPs) or master limited partnerships (MLPs) models, we find that the mean-variance frontier of a reference investor can be improved.

The answer to our initial question this partly depends on how “infrastructure” is defined and understood as an asset selection scheme.

Under our third definition of infrastructure, which focuses on the relationship-specific and contractual nature of the infrastructure business, we find that listed infrastructure may help identify exposures that have at least the potential to persistently improve portfolio diversification on a total return basis, as the figures to the right/below illustrate. This effect is driven by the regularity and the size of dividend payouts compared to other corporations, infrastructure or not.

What determines this ability to deliver regular and high dividend payouts is the contractual and governance structure of the underlying businesses, not their belonging to a given industrial sector. Bundles of PPP project companies or MLPs behave differently than regular corporations i.e. their ability to retain and control the free cash flow of the firm is limited and they tend to make large equity payouts. In the case if PPP firms, as Blanc-Brude, Hasan, and Whittaker (2016) show, they also pay dividends with much greater probability than other firms.

In other words, going beyond sector exposures and focusing on the underlying business model of the firm is more likely to reveal a unique combination of underlying risk factors.

However, it must be noted that the relatively low aggregate market capitalisation of listed entities offering a “clean” exposure to infrastructure “business models” as opposed to “infrastructure corporates” may limit the ability of investors to enjoy these potential benefits unless the far larger unlisted infrastructure fund universe has similar characteristics.

Future work by EDHECinfra aims to answer these questions in the years to come.

Mean-variance spanning of US listed infrastructure

Mean-variance spanning of UK listed PFI


Blanc-Brude, Frédéric. 2013. “Towards Efficient Benchmarks for Infrastructure Equity Investments.” EDHEC-Risk Institute Publications, Meridiam, Campbell-Lutyens and EDHEC Research Chair on Infrastructure Equity Investment Management and Benchmarking. Singapore: EDHEC-Risk Institute, 88. http://edhec.infrastructure.institute/wp-content/uploads/publications/blanc-brude_2013u.pdf.

Blanc-Brude, Frédéric, Majid Hasan, and Tim Whittaker. 2016. “Revenue and Dividend Payout in Privately Held Infrastructure Investments.” EDHEC Infrastructure Institute Publications, EDHEC, Meridiam and Campbell-Lutyens Research Chair on Infrastructure Equity Investment Management and Benchmarking March (March). Singapore: EDHEC Infrastructure Institute-Singapore. http://edhec.infrastructure.institute/wp-content/uploads/publications/blanc-brude_2016a.pdf.

Huberman, G., and S. Kandel. 1987. “Mean-Variance Spanning.” The Journal of Finance 42 (4): 873–88.

Kan, Raymond, and Guofu Zhou. 2012. “Tests of Mean-Variance Spanning.” Annals of Economics and Finance 13: 139–87. doi:10.2139/ssrn.231522.