A global investment opportunity in non-listed infrastructure for institutional investors
| Published date | 14 May 2020 |
| Date | 14 May 2020 |
| Pages | 239-255 |
| DOI | https://doi.org/10.1108/JPIF-11-2019-0142 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Muhammad Jufri Marzuki,Graeme Newell |
A global investment opportunity in
non-listed infrastructure for
institutional investors
Muhammad Jufri Marzuki and Graeme Newell
School of Business, Western Sydney University, Penrith, Australia
Abstract
Purpose –Infrastructure investment is one of the few high-calibre real alternative assets with a strong
prominence in the portfolios of institutional investors, especially those with a liability-driven investment
strategy. This has seen increased institutional investor interest in infrastructure for reasons such as
diversification benefits and inflation hedging abilities, resulting in the substantial growth in non-listed and
listed investment products offering access to the infrastructure asset class, and complementing the existing
route via direct investment. This paper aims to assess the investment attributes of non-listed infrastructure
over Q3:2008–Q2:2019, compared with other global listed assets of infrastructure, property, stocks and bonds.
Design/methodology/approach –Quarterly total returns were derived from the valuation-based MSCI
global non-listed quarterly infrastructure asset index over Q2:2008–Q:2019, which were then filtered to
decrease the valuation smoothing effects. A similar set of returns data was also collected for the other global
asset classes. The average annual return, annual risk, risk-adjusted performance and portfolio diversification
benefits for non-listed infrastructure and other asset investment classes were then computed and compared.
Lastly, a constrained optimal asset allocation analysis was performed to validate the performance
enhancement role of global non-listed infrastructure in a mixed-asset investment framework.
Findings –Global non-listed infrastructure delivered the strongest average annual total return performance,
outperforming the other asset classes and provided investors with total returns that linked strongly with
inflation. Global non-listed infrastructure also provided investors with one of the least volatile investment
returns because of its ability to ensure predictable total returns delivery. This means that on the Sharpe ratio
risk-adjusted return basis, non-listed infrastructure was also the strongest performing asset. This performance
was also delivered with significant portfolio diversification benefits with all assets, resulting in non-listed
infrastructure contributing to the mixed-asset portfolios across the entire portfolio risk spectrum.
Practical implications –Aside from better risk-return trade-offs, institutional investors are getting more
secular with their portfolios for alternative assets that are able to provide other investment benefits such as
predictable long-term performance and inflation-linked returns. A further improvement in performance and
diversification benefits could be achieved by enriching existing investment portfolios with real alternative
assets, one of which is the infrastructure asset class. For institutional investors, having exposure to and being
part of the development, delivery and management of infrastructure assets are important, as they are one of the
few real assets having considerable significance in the context of society, economy and investment needs.
Originality/value –This is the first research paper that empirically investigates the investment attributes of the
non-listed infrastructure at a global level. This research enables empirically validated, more informed and practical
decision-making by institutional investors in the infrastructure asset class, especially via the non-listed pathway.
The ultimate aim of this paper is to empirically validate the strategic role of non-listed infrastructure as an important
alternative asset in the institutional real asset investment space, as well as in the overall portfolio context.
Keywords Non-listed infrastructure, Global, Risk-adjusted performance, Asset allocation, Institutional
investors, Real assets
Paper type Research paper
Introduction
Effective infrastructure is an important pillar for social well-being and economic growth in
both the developed and emerging markets, with considerable variation in infrastructure
quality across countries. Hong Kong (infrastructure quality ranking: (1), Singapore (2), UAE
(3), The Netherlands (4) and Switzerland (5) are some of the advanced economies with
Non-listed
infrastructure
239
This paper forms part of a special section “Industrial Infrastructure and Real Estate”, guest edited by
Professor Seow Eng Ong, Associate Professor Chyi Lin Lee.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 11 November 2019
Revised 28 March 2020
Accepted 14 April 2020
Journal of Property Investment &
Finance
Vol. 39 No. 3, 2021
pp. 239-255
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-11-2019-0142
high-quality infrastructure across several qualitative and quantitative measures in the World
Economic Forum (2019) Infrastructure Competitiveness Ranking. Infrastructure is also a key
dimension in the effective functioning of the increasingly transparent global property
markets (JLL, 2018). According to McKinsey (2017), global infrastructure will require
US$69.4tn in investment volume over 2017–2035, with certain segments of infrastructure
such as power (total investment expenditure: US$20.2tn; % of total infrastructure investment:
29 per cent), road (US$18.0tn; 26 per cent) and telecommunication (US$10.4tn; 15.0 per cent),
requiring a significantly higher capital deployment to accommodate the structural changes
currently taking place globally in areas such as social demographic, economic growth and
advances in technology. Government budget constraints have resulted in reduced
government involvement in providing this infrastructure, necessitating a larger volume of
private investment to serve as a gap filler in the creation, delivery and management of
infrastructure assets for the future infrastructure needs globally (RREEF, 2005). This has
seen infrastructure absorbing a significant capital inflow from institutional investors in
recent years, resulting in the growth in the listed infrastructure and non-listed infrastructure
spaces, and increased interest in infrastructure as a separate asset class to property
(Finkenzeller et al., 2010;Newell et al., 2011;RREEF, 2005).
Extensive empirical investigations have assessed the general benefits, characteristics and
risk factors of infrastructure (e.g.: Grimsey and Lewis, 2002;Newell and Peng, 2008a;Page
et al., 2008;RREEF, 2005;Torrance, 2009) and financial considerations of infrastructure
investment (e.g.: Dimovski, 2011;Gemson et al., 2012;Panayiotou and Medda, 2014).
Empirical research has also assessed the risk-adjusted performance and portfolio
diversification benefits of listed infrastructure in a portfolio for specific countries,
including Australia (e.g.: Bird et al., 2014;Newell et al., 2011;Peng and Newell, 2007), USA
(e.g.: Bianchi et al., 2014;Bird et al., 2014;Martin, 2010;Newell and Peng, 2008b;Wurstbauer
and Schafers, 2015), UK (Oyedele, 2014), China (Newell et al., 2009) and India (Singhal et al.,
2011), and at a European level (Oyedele et al., 2013) and global level (Oyedele et al., 2014;Rodel
and Rothballer, 2012;Sawant, 2010). In most cases, the positive added-value role of listed
infrastructure in a mixed-asset portfolio was evident.
However,less empirical researchis available concerningnon-listed infrastructure,involving
only limited non-listed infrastructureseries in specific countries. This includesAustralia (e.g.:
Bird et al., 2014;Finkenzeller et al.,2010;Newell et al.,2011), UK (Hartigan et al., 2011) and USA
(Dechant and Finkenzeller, 2013;Wurstbauer and Schafers,2015). The common consensus in
this research was clear; non-listed infrastructure played a positive role in the mixed-asset
portfolio. Several studies have also considered direct property versus infrastructure in a
portfolio for listed infrastructure (Bond et al.,2007) and non-listed infrastructure (Newell and
Lee,2011a), with Moss (2014) consideringblended portfoliosof listed infrastructure(30 per cent)
and non-listedinfrastructure(70 per cent). Key factorsin this out-performance ofinfrastructure
reflected a period of significant infrastructure growth, major infrastructure investment by
institutionalinvestors, increased maturity of private infrastructure in both the developed and
emerging marketand, more importantly, the availability of suitable investment products that
enable access to theinfrastructure asset class for institutional investors.
No empirical research has been conducted concerning global non-listed infrastructure in a
global mixed-asset portfolio. This is a key institutional investor investment issue regarding
infrastructure as an asset investment class, as 53 per cent of the fund managers prefer
globally focused non-listed infrastructure funds, and 59 per cent of the sovereign wealth
funds now see a global infrastructure strategy as their preferred strategy, and non-listed
infrastructure funds (70 per cent) as the preferred infrastructure investment vehicle for
institutional investors (Preqin, 2016a,b). As such, to fill this research gap, the purpose of this
paper is to use the MSCI global non-listed infrastructure benchmark series to assess the
significance, risk-adjusted performance and portfolio diversification benefits of global non-
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