Infrastructure debt in a portfolio context

Part of the Alternative View series - By David van Bragt

We explore the added value of infrastructure debt in a portfolio context. Infrastructure debt appears to have an attractive risk-return trade-off in combination with diversification potential in a fixed income portfolio of a pension fund or insurance company.

We base our analysis on the available benchmark data for this asset class. Since the available data is limited, we also performed several sensitivity analyses.

Infrastructure relates to equipment, facilities and networks providing essential public services. These real assets generate predictable long-term contracted and/or regulated revenues. The asset class is supported by structural trends like the EU and national governments committing themselves to a transition to clean and renewable energy.

Examples of infrastructure investments are investments in wind and solar energy, environmental projects with a focus on recycling or re-using waste, and reducing the carbon footprint with innovative transport projects. Focusing on infrastructure debt, so excluding infrastructure equity, the total amount of investments in the EU was €70 billion in 2017. Germany, France, Italy, Benelux, Spain and Portugal represent 83% of the euro-denominated market. The UK is the largest European market.

Impact of adding infrastructure debt

Our analysis shows that an allocation of 5% to infrastructure debt, which is funded by selling 5% of euro core sovereigns, leads to an increase of the average return on assets/liabilities with 0.3%-point (per year). A somewhat smaller effect is visible when funding infrastructure debt with credits or mortgages. A slightly lower average return occurs when we fund infrastructure debt with equities. We see similar effects for the 5% most positive and negative scenarios, except when we substitute equities with infrastructure debt. In this case the return in the most positive scenarios decreases (with 0.6%-point). On the other hand, results improve (with 0.5%-point) in the most negative scenarios.

We also carried out several sensitivity analyses, such as a higher volatility or a lower expected return for infrastructure debt. Generally speaking, this also leads to a positive effect on the portfolio level in these alternative cases.





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