The separation of the beta and alpha decisions is impossible as the estimation of the obtainable beta is a function of a limited set of vehicles.
Since investors committing capital to infrastructure are pursuing a de facto active strategy, negative or positive selection biases are likely. If returns dispersion is significant, failing to access upper quartile infrastructure funds may result in very poor performance indeed.
Knowledge gap
Today, we do not know what portfolio benefits infrastructure can bring. We are faced with a lack of evidence about performance, compounded by a lack of knowledge about expected returns and correlations – not a small question if pension funds need to be convinced to invest in infrastructure in search of beta drivers.
The lack of accepted benchmark prevents the majority of investors from understanding the characteristics of infrastructure investment and without a consensus on historical returns little guidance on strategic asset allocation can exist. How should we design good benchmarks of long- term returns?
Analytically, the primacy of contracts in infrastructure investment suggests the need to identify how standard contractual terms drive cash flow volatilities and to create generic risk categories that are relevant to the risk/return profile of contracts. Likewise, the role of public policy means that not only are countries a fundamental dimension of relevant building blocks, but also that most contracts feature hidden options on the downside.
Above all, infrastructure investment products should be determined by the financial economics of contracts, not sectoral lines. Infrastructure investment would then be much more likely to deliver consistent performance and final investors could appreciate whether allocating to infrastructure improves the risk/ return profile of their portfolios.
Frédéric Blanc-Brude is a research director at EDHEC Risk Institute–Asia.
