The Overlooked Asset Class

Roger McNamee, the American businessman and sometime musician said “We need to stop thinking about infrastructure as an economic stimulant… [since]economic stimulants produce Bridges to Nowhere. Strategic investment in infrastructure produces a foundation for long-term growth.” In 2013, Transportation for America identified that one in nine U.S. bridges—a jaw-dropping 66,000 of them—are deficient, and they are a striking example of the USD 1 trillion per year global infrastructure spending gap identified by the World Economic Forum last year.

If—as McNamee trumpets—infrastructure investment promotes growth, owners of large pools of capital should, by design, be interested. Global pension assets are one such reservoir, totaling around USD 40 trillion and predicted to increase to USD 65 trillion1 by 2020, yet less than 1% of aggregate pension assets are invested in infrastructure, and those funds that are sold on the investment benefits are finding a persistent gap between actual investment (2.9%) and their target allocations (3%-5%).2 The asset class is attractive to institutional investors looking for growth and inflation hedging, with investment return expectations for “Core” and “Core Plus”—investments in societal staples such as bridges, rail, roads, and airports—near 7%-13% per year.3

So why is the channel between spending requirements and return seekers seemingly unbridged? Three possibilities exist. First, the availability of suitable investment opportunities seems limited, as characterized by unallocated investment capital, which is at a record level of USD 100 billion.4 Second, the median pension fund infrastructure investor size is USD 6 billion,5 pointing to expertise and governance requirements many funds consider beyond their scope. Third, in a pensions management world where there is persistent and relentless focus on cost, specialized infrastructure manager fees of 2% and 10% of excess return over 8%6 are out of kilter. Infrastructure returns—in this context—seeming to have high barriers to entry.

But do they? A growing globally listed equity market now capitalized at approximately USD 3.5 trillion, with daily average trading volumes of USD 15 billion,7 affords funds the liquidity many desire, as well as a “governance advantage” due to the stringent regulatory demands and reporting requirements of listing. So far so good then—but what do the returns look like when holding liquid investments for the long term?

Two interesting outcomes can be observed. First, 10-year annualized returns—as represented by the Dow Jones Brookfield Global Infrastructure Index—compare favorably to the top end of the “Core Plus” range of return expectations (10%-13%).