Constructing an investment return series for the UK unlisted infrastructure market: estimation and application

Abstract

The global infrastructure investment community is hamstrung by a lack of adequate data surrounding unlisted infrastructure performance outside Australia. In response, this paper aims to estimate a UK unlisted infrastructure series. This is achieved by creating a synthetic return series drawing on information from different asset classes and geographical markets. The estimated unlisted return series determined to be the most appropriate has lower volatility relative to UK listed infrastructure and lower correlation with both UK listed infrastructure and UK equities. Additionally, it is based on data from the same geographical market and the same underlying asset market. A working application of the return series is presented in the context of infrastructure’s asset allocation in a balanced portfolio and across infrastructure investment segments for the UK investment market. Findings suggest that infrastructure investment has a significant role to play in investors’ balanced portfolios. Furthermore, results indicate target allocations of 80% and 20% for unlisted and listed infrastructure respectively.

Keywords:

• infrastructure investment
• ratio analysis
• Fourier analysis
• portfolio construction asset allocation

Acknowledgements

The authors would like to thank the referees for their useful comments and suggestions on an earlier version of this paper. All errors are our own.

Notes

1. An earlier version of this paper was presented at the Fifteenth Annual Conference of the Pacific Rim Real Estate Society (PRRES) Conference, Sydney, Australia (19–22 January 2009).

2. These include the AMP Diversified Infrastructure Equity Fund (September 1995), the Colonial First State Wholesale Infrastructure Income Fund (October 2003), the Perpetual Diversified Infrastructure Fund (January 2005), Hastings’ the Infrastructure Fund (October 2000) and the Utilities Trust of Australia (December 1994).

3. The IPD and Mercer return series for Australian property exhibit a high degree of correlation: in excess of 0.97.

4. The choice for the analyst is to choose the appropriate window length. This may be assisted by conducting a sensitivity analysis between the value of θ with changes in ω.

5. Note we use the Discrete Fourier Transformation (DFT). The reader is referred to Stein and Weis (1971) and Cochrane (1997) for an introductory overview to Fourier analysis.

6. While the input series should be from the same market, this does not necessarily preclude the use of a parameter estimate based on data from another market.

7. Diversification benefits arise when the portfolio risk can be reduced beyond that of any individual portfolio assets.

8. The estimation period was chosen to end in September 2007 rather than September 2008 to isolate the impact of the current financial crisis that began around August 2007.

9. The MSR is computed as the ratio of portfolio average return to portfolio standard deviation.

10. A strategic asset allocation is comprised of a base portfolio mix of assets aimed at delivering on the longer‐term investment objective.