Back in positive territory thanks to a strong cash yield. Roads are back in the black but airports struggle on. Contracted infrastructure continues to be a safe bet
The unlisted infrastructure asset class is back to positive returns at the aggregate level, but only thanks to the strong cash yield of infrastructure companies.
The infra300 index which tracks a representative global sample of unlisted infrastructure equity investments worth approximately USD190bn, is up 1.84% on the quarter, after two negative quarters since the start of the year. On a year-on-year basis, the index is down -7.8%, including a -15.7% drop in capital return and 7.9% income return (cash yield).
At the sector level, performance is mixed. A value-weighted index of unlisted equity investments in the transport sector (TICCS®-IC60) registers total returns very close to zero on the quarter, thanks to positive returns in the road sector (2.38%) which have seen their revenue forecasts improve compared to Q2 and no increase in market risk premia. Airports continue to struggle with returns of -2.3% on the quarter, driven by higher risk premia and lower expected revenue. On a year-on-year basis, transport is down -16.66%, roads have total returns of -12.74%, and the airports report -19.01% total returns calculated in local currency.
Regulated utilities (TICCS®-IC80) also keep suffering with the corresponding EDHECinfra index showing -1.9% in Q3 2020 and -15.2% year-on-year. In contrast, contracted infrastructure (TICCS®-BR10) shows small but positive returns in Q3 and is down only -5.7% year-on-year due to an increase in risk premia but helped by lower interest rates and stable cash flows.
On a risk adjusted basis, the performance of contracted and regulated assets continues to be more appealing than merchant infrastructure (TICCS®-BR20) which has seen its Sharpe ratio halved since the start of the Covid-19 crisis.
Following the recent drawdowns in several sectors, the value-at-risk of the infra300 has been trending from 15% to more than 18% since Covid-19 started, but remains below the typical thresholds used in the Solvency frameworks.
Private Infrastructure debt indices are also published today. Thanks to lower spreads on infrastructure corporate debt at approx. 120bp down from 180bp two quarters ago, and flat project finance debt spreads (approx. 160bps), the broad market private infrastructure debt index continues to show stable albeit compressing returns, with 1.4% total return on the quarter and slightly more than 4% return year-on-year.