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.

Discussion of the Bank of Ireland Paper on loan origination by investment funds

In July 2013 the Central Bank of Ireland issued a discussion paper on loan origination by investment funds, in which it suggests that developing alternative sources of financing to bank loans may be beneficial to the real economy but requires the careful consideration of the potential development of “shadow banking” risks.

In this response to the discussion paper, we argue that the development of alternative sources of financing is most relevant with regards to long-term private debt, in particular the financing of SMEs and infrastructure projects. The demand for such financing has been identified as instrumental to long-term growth in Europe, which justifies regulatory changes.

Who is afraid of Construction Risk? Portfolio Construction with Infrastructure Debt

This paper is the first of series discussing the opportunity for long-term institutional investors such as pension funds, insurance companies or sovereign wealth funds, to invest in large portfolios of infrastructure debt, both to manage their liabilities and to minimise their exposure to capital market volatility. Our analysis focuses on project finance debt since it represents the bulk of existing and, in all likelihood, future infrastructure debt.

In what follows, we review existing academic research on infrastructure project finance and propose a theoretical and empirical analysis of the role of credit risk in infrastructure debt from a portfolio standpoint, on a held-to-maturity basis.

infraMetrics® by EDHECinfra

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