Dow Jones & Company and Brookfield Asset Management have formed the latest partnership to create what the two hope will be the infrastructure benchmark, adding to the debate over what is infrastructure.
Standard & Poor’s and FTSE, in partnership with Australia’s Macquarie Group, already have infrastructure indexes that track publicly traded infrastructure stock. Meanwhile Investment Property Databank is in the early stages of developing the first private infrastructure index, and company executives plan to release a consultative index, or first draft, next year.
FTSE Group was first, launching its index five years ago. Company officials also are planning to release a new set in the next 12 to 18 months outside of their partnership with Macquarie that will also license investment products.
FTSE executives say the Macquarie Global Infrastructure index is used as a benchmark by 50 institutional investors. Still, no index is used as a stand-alone benchmark, largely because of the split over how to define infrastructure. The debate centres on a number of issues, including whether utilities should be included in an infrastructure index, whether a company that has an infrastructure side business should be considered an infrastructure company and whether a construction or engineering firm that works on infrastructure projects should be considered an infrastructure company.
Investors also are not using the index as a stand-alone benchmark because an index of publicly traded securities does not match with an investment portfolio of private investment vehicles. Executives at Dow Jones Indexes and Brookfield say they created their partnership because infrastructure money managers, in particular private fund managers, were frustrated with the existing benchmarks. That’s because they include utilities, which add a great deal of volatility and are not included in most private equity infrastructure funds, said Kim Redding, chief executive officer of Brookfield Redding, the institutional global real estate and infrastructure securities subsidiary of Brookfield Asset Management.
But FTSE’s Moskowitz said that eliminating utilities from an infrastructure index is “crazy…Utilities are an important part of the infrastructure equation,” he said. “If your perspective is global, you need utilities, and if it adds volatility, so be it.”
Mark Weisdorf, global chief investment officer of JPMorgan Asset Management’s infrastructure investments group in New York, said that many private direct investors in infrastructure have been using one of three measures: CPI plus; the London inter-bank offered rate plus; and some nominal fixed rate plus. A few investors are considering using country-weighted or risk-weighted CPIs. Investors are using these as benchmarks because the rates that may be charged, and the revenue and cash flow generated is often linked to inflation, he said. JPMorgan executives would prefer not to have their funds compared to a benchmark that includes utilities because utilities are too volatile to be included in a JPMorgan infrastructure strategy, Weisdorf said.
JPMorgan’s strategy focuses on investments with more certainty and more predictable returns. Merchant power utilities do not have a steady predictable cash flow, he said.
But a more definitive benchmark for the asset class has yet to be developed, he said. “When somebody creates a robust private total return index and takes the time to get enough data from industry participants, that will likely become the most popular,” said Weisdorf, who previously was vice president of private market investments for the C$122.7 billion Canada Pension Plan Investment Board. “Everybody is grasping for the best benchmark that they can when there is no robust private benchmark.”