EDHECinfra: Infrastructure investors should abandon absolute return benchmarks

EDHECinfra: Infrastructure investors should abandon absolute return benchmarks

June 26, 2020

Infrastructure Real Assets
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EDHECinfra has just published a new study: 'Infrastructure investors should abandon absolute return benchmarks: Lessons from the Covid-19 lockdowns'. To make its point, it shows that the impact of Covid-19 on unlisted infrastructure portfolios on different investors can only be understood from a benchmark-relative perspective.

The study finds that different infrastructure sectors have been impacted very differently by the lockdowns in terms of future cash flows but also risk premia and interest rate movements. In aggregate, the impact for a diversified infrastructure investor is negative but numerous sectors performed better on a relative basis. The infra300 index is down -6.4% in the first quarter, merchant roads suffered a -13.5% return, but wind power was down only -2.6% due to the market-wide spike in the risk premia.

The paper also shows that different peer-groups were impacted differently by Covid-19, with asset managers underperforming the market in Q1 2020 by almost 300bp but also outperforming over longer periods, whereas asset owners have on average been in line with the market return in Q1 2020 but performed less well than asset managers over time.

Using a benchmark-relative approach, large asset managers are also found to generate almost double the alpha of asset owners but also to be more exposed to the kind of 'merchant' transport infrastructure that suffered the most from the Covid-19 lockdowns.

"We wanted to show that with absolute return benchmarks it's impossible to make sense of the impact of Covid-19," says Frederic Blanc-Brude, Director of EDHECinfra and a co-author of the study. "While there are large negative returns this year in infrastructure, it still makes sense to try and understand which portfolios and investors perform better."

Co-author Abhishek Gupta adds: "It also matters to understand why returns are negative. Of course, there is the impact of Covid-19 on cash flows, but market rates and risk premia also changed, and only a mark-to-market approach can give you this level of understanding of your performance."

The paper shows that for years investors had little choice but to use absolute return benchmarks which they knew to be inadequate, for lack of viable alternatives. It describes how significant improvements in data availability and advanced asset pricing techniques applied to real assets now permit a genuine mark-to-market benchmarking of unlisted infrastructure portfolios.

The paper is co-authored by Noël Amenc (professor of Finance, EDHEC Business School), Frederic Blanc-Brude (Director EDHECinfra), Abhishek Gupta (Senior Product Specialist, EDHECinfra) and Leonard Lum (Analyst, EDHECinfra).

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