In this issue of EDHECinfra Research Insights, we first discuss the surprising persistence of absolute return benchmarks in unlisted infrastructure investment. Today, absolute return benchmarks are the norm in the unlisted infrastructure investment sector, yet they are completely inadequate to understand the risk, performance and contribution of infrastructure assets to the total portfolio. The vast majority of investors agree with this assessment. We review what investors have to say about it, the reasons why these benchmarks are inadequate but also why they have tended to persist.
We establish that while long-only infrastructure investment cannot be considered an absolute return strategy (since it not market-neutral) the usual alternatives of using appraisals or listed proxies have been even worse options because they mis-represent the asset class. Absolute return benchmarks have persisted as the lesser evil.
However, recent innovations have increased the range of available choices to benchmark unlisted infrastructure. We show that that the Q1 2020 release of the EDHECinfra indices captured the impact of Covid-19 on infrastructure investment with a high degree of granularity; each sub-index capturing a different risk profile for different segments of the universe.
Leveraging this granularity, a complete analysis of the sources of risk and performance of any infrastructure portfolio can be conducted. In a second article, we use this data to better understand the performance of two peer groups of infrastructure investors: large asset managers and large asset owners.
We show that large infrastructure asset managers outperform the market and large asset owners thanks to the better asset selection skills. We also find they are not able to use asset allocation to different sectors or business risk segments to improve their performance. Instead, they often underperform the benchmark because of their implicit or de facto asset allocation choices.
Next, we summarise some of the findings of a new paper exploring whether infrastructure companies exhibit statistically significant differences from other investable assets. Controlling for variables like size, profitability, leverage, investment opportunities and industry, we show that they do indeed demonstrate unique fundamental characteristics including higher asset tangibility, asset illiquidity and inflexibility and lower operating leverage than a control sample of non-infrastructure firms.
A fourth article presents the first steps of our research program on the ESG characteristics of infrastructure companies: it highlights some of the key findings of a comprehensive review of ESG standards used in the infrastructure sector and argues that as the standardization of ESG follows its path towards consolidation, a scientific, theory-based approach to designing and implementing ESG assessments still remains to be built.