Source: MSCI (2021a), EDHECinfra (2021a), Bloomberg as of September 2021
Note: Estimation methodology and calculations varies between index providers.
Private investors are always looking to diversify and optimise their portfolios. Over time, infrastructure has proven to be an attractive option because of its strong performance, with infrastructure debt and unlisted infrastructure equities growing tremendously in popularity among private investors.
Asset allocation is crucial for investors, who select asset classes that align with their risk tolerance and targeted return. The graph shows 10-year risk-return data to highlight the different profiles of infrastructure assets.
First is infrastructure debt, which accounts for about 80% of infrastructure investment. This asset provides a highly attractive risk-return proposition in the financial market for fixed-income securities. Over the preceding decade, infrastructure debt provided three times the return provided by 10-year government bonds of developed markets (US, Canada, and England) at slightly higher risk. Specifically it provided an annualised return of 5.9% with an annualised risk of 3.3%. This can be compared against an annualised return between 1.3% and 2.0% for government bonds with an annualised risk between 2.1% and 2.9%.
Next are listed infrastructure equities, which bring a higher return than infrastructure debt but also a significantly higher risk. Over the preceding decade, listed infrastructure equities provided a return of 6.9% at a 12.0% risk. It should be noted that these results are mainly driven by certain markets. Listed infrastructure equity performance in developed markets is much stronger than that in emerging markets. The less attractive performance in emerging markets is due to their less mature private infrastructure markets and underdeveloped and illiquid capital markets – especially stock markets. Over a decade, listed infrastructure equities in developed markets provided almost four times the return of listed infrastructure equities in emerging markets (7.8% and 2.4%, respectively) at a lower risk (12.1% and 15.7%, respectively).
Lastly, we examine unlisted infrastructure equities, which bring almost twice the return of listed infrastructure equities at a similar risk. Over a decade, unlisted infrastructure equities provided an annualised return of 12.4% at a 12.2% risk. Global equities provided a similar return of 12.5% but at a higher risk of 13.5%. Global equities may perform better in the short term, but a comparison of historical performance among types of equities shows that unlisted infrastructure equities have generated higher returns and higher risk-adjusted returns than an average global equity.
Considering these performance data, it is clear that infrastructure assets have significant potential within investment portfolios. This is especially true of unlisted infrastructure equities, which have gained widespread recognition as a mainstream investment option, based on their attractive performance in developed markets.