Infrastructure investing needs a tight definition

In an environment of considerable market volatility and inflation risk, investors globally are searching for defensive portfolio solutions. As such, infrastructure investments have gained greater focus in recent years as investors are drawn to the defensive characteristics of the sector. Inflation protection, reduced volatility (relative to broader equity markets), and portfolio diversification benefits are amongst the core tenants of what an infrastructure approach has to offer. But investors face a dilemma: will an expected defensive asset actually deliver these defensive characteristics when required? History has shown that infrastructure assets have demonstrated considerable variances in defensiveness, both in recent years, and most notably during the Global Financial Crisis (GFC). Investors' perception of the performance of listed infrastructure during the GFC was hugely impacted by the investment strategy that they had chosen, or the infrastructure index they may consider as a proxy of the sector's performance. In the author's opinion, the reasons for this variance are poorly understood. Moreover, the typical definition of infrastructure continues to broaden within the market today. This paper contends that infrastructure investing requires a tight definition to deliver the defensive attributes that investors are targeting. The most significant factor that impacts the defensiveness of the sector can be found in the very definition itself. It is proposed that core infrastructure investing requires an approach that looks beyond the physical attributes of a security, and instead delves into the commercial frameworks in which the assets operate. Of second most importance is the influence of corporate governance. The variance in returns experienced across the sector is considered, in both recent years and during the GFC. The impact that these two factors – (a) the definition used; and, (b) corporate governance – had on the variance of returns is then analysed. Examples of assets that are commonly referred to as infrastructure (including ports and integrated utilities) are discussed, and examples of corporate governance practices in the sector that are concerning are highlighted. The paper concludes that the definition of infrastructure used by an index (or an investment manager) has a substantial impact on its defensiveness. Further, it is argued that investment managers should select indices consistent with their investment strategy – and so, the choice of infrastructure index for each investment strategy provides a valuable insight into the likely defensiveness of the strategy.