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Infrastructure: Real Assets and Real Returns

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Abstract

Little empirical work has been done on the return properties of infrastructure as an asset class despite increased allocations by institutional investors. Managers claim infrastructure investments offer real return benefits via a combination of monopolistic and defensive assets. We build a robust factor model of infrastructure returns and estimate the model using U.S. and Australian infrastructure and utility data. We find evidence of excess returns and inflation hedging, but not of defensive characteristics during equity market downturns. We also compare the performance of regulated infrastructure assets to option-based models designed to synthetically replicate infrastructure asset returns, and identify the regulatory risk premium (the premium for government regulation of infrastructure investments). We find that the returns from infrastructure have outperformed option-based replicating strategies over the period from 1995-2009 in Australia, for historical reasons. Finally, we suggest how improved defensive and inflation hedging characteristics can be obtained using a combination of inflation linked bonds and covered call strategies.

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Bibliographic Info

Paper provided by The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney in its series Working Paper Series with number 11.

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Length: 50 pages
Date of creation: 01 Sep 2011
Date of revision:
Handle: RePEc:uts:pwcwps:11

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Keywords: inflation hedging; regulatory risk premium; infrastructure assets;

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References

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  1. Shafir, Eldar & Diamond, Peter & Tversky, Amos, 1997. "Money Illusion," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 341-74, May.
  2. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  3. Alex Robson, 2005. "Rent Seeking and the Presence of Existing Distortions," ANU Working Papers in Economics and Econometrics 2005-448, Australian National University, College of Business and Economics, School of Economics.
  4. Bitsch, Florian & Buchner, Axel & Kaserer, Christoph, 2010. "Risk, return and cash flow characteristics of infrastructure fund investments," EIB Papers 4/2010, European Investment Bank, Economics Department.
  5. Gary Gorton & K. Geert Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," NBER Working Papers 10595, National Bureau of Economic Research, Inc.
  6. Ludovic Phalippou, 2009. "Beware of Venturing into Private Equity," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 147-66, Winter.
  7. Ron Bird & Harry Liem & Susan Thorp, 2010. "Hedge Fund Excess Returns Under Time-Varying Beta," Working Paper Series 9, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.
  8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  9. Ron Bird & Harry Liem & Susan Thorp, 2011. "Private Equity: Strategies for Improving Performance," Working Paper Series 12, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.
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Cited by:
  1. Ben Ammar, Semir & Eling, Martin, 2013. "Common Risk Factors of Infrastructure Firms," Working Papers on Finance 1307, University of St. Gallen, School of Finance.

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