Strategic Asset Allocation with Unlisted Infrastructure

In this paper, we show how the traditional indexes used as proxies for unlisted infrastructure fail to represent the qualities of the asset class. Listed infrastructure indices are highly correlated with the wider equity universe – if the asset class behaved in this way, there would be little point in investors buying it as it would not add much in terms of diversification or improving the risk-return profile of the portfolio. Appraisal-based indices are correlated with nothing at all, making them singularly useless for the task in hand – their construction gives results that are so “smooth” that volatility is very low and correlations close to zero, which would signal unrealistically high risk-return rewards that are simply unfeasible in the real world. EDHECinfra’s indices of unlisted infrastructure, on the other hand, such as the infra300®, represent the characteristics of this asset class well, making them the best available proxy for investors to use.

We also show how investors can carry out a simple asset allocation exercise to calculate the optimal allocation they should be making to unlisted infrastructure based on their individual portfolio needs. Using different optimisation techniques and parameters, and considering different investor profiles, our research signals consistent allocations to infrastructure in the region of 10%, many times current levels. Our indices also offer a granularity that can help portfolio design in a way that broader and less well-defined proxies are unlikely to achieve for those seeking to optimise risk-adjusted returns.

Anatomy of a Cash Cow

This paper examines how infrastructure companies differ from the rest of the economy and in particular whether or not they tend to pay larger and more frequent dividends i.e. whether infrastructure really is a ‘cash cow.’ We find that infrastructure companies exhibit key systematic differences with a sample of ‘matched’ firms that are otherwise comparable in size, leverage, revenue growth or profits. Infrastructure companies are different because they tend to exhibit high asset tangibility, asset illiquidity and asset inflexibility, as well as lower operating leverage, as measured by a range of well-established metrics founds in the academic literature. Finally, we find that infrastructure companies do pay higher (but not more frequent) dividends than other firms and that these higher payout ratios correlate well with the characteristics we have identified. We argue that using these characteristics provides an important robustness check to identify infrastructure assets.

Dividend Growth & Return Predictability: A Dynamic Approach

Dividend yields are a determinant of asset prices, but changes in dividend growth impact both dividend yields and discount rates. As a result, dividend growth is typically treated as a known constant in most of the literature.

In this paper, we develop a dynamic approach to forecasting dividend growth using Bayesian filtering techniques, which improves markedly on standard linear methods. The resulting growth-adjusted dividend yield improves out-of-sample return predictions by several orders of magnitude. These results show that dynamic cash flow modeling can significantly improve the performance of expected return models.

2016 EDHEC-Risk Institute Research Insights

This special supplement of IP&E highlights the findings of new research on infrastructure investments that were presented at EDHEC-Risk Days 2016.

Drawing on research from the Meridiam/ Campbell-Lutyens research chair at EDHECinfra, we analyse the characteristics of cash flows in private infrastructure firms and find that infrastructure firms exhibit a truly unique business model compared to public and private rms. The equity payout behaviour of infrastructure firms is very different from that of other firms: infrastructure firms pay more often and in significantly higher proportions of their revenues than other firms once the lifecycle of the rm is taken into account. We conclude that infrastructure firms have significantly lower volatility of revenues and profits and pay a much higher proportion of their revenues much more frequently to their owners, independent of the business cycle.

On the subject of the cash flow dynamics of private infrastructure project debt, as part of the Natixis research chair at EDHECinfra, we produce new results using a new infrastructure cash ow database. We show that a powerful statistical model of credit ratio dynamics provides insights for the valuation of private credit instruments in infrastructure project nance. It also militates for standardising the data collection and computation of items such as the debt service cover ratio in infrastructure project nance, and for pooling this information in central repositories where it can be used to create the investment metrics that investors need (and regulators require) to be able to invest in large, illiquid assets such as private infrastructure project debt.

Revenue and dividend pay-outs in privately-held infrastructure investments: Evidence from 15 years of UK data

In this paper drawn from the EDHEC/Meridiam/Campbell Lutyens Research Chair, and using the largest database of infrastructure cash flows available for research, we compare the revenues, profits and dividend pay-out behaviour of infrastructure and non-infrastructure firms in the UK. The paper addresses two main questions: do infrastructure firms correspond to a different business model than other firms active in the economy? And do infrastructure firms exhibit a different equity pay-out behaviour than other firms?

infraMetrics® by EDHECinfra


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