The purpose of this paper is to update the detailed analysis of the major global listed infrastructure indices we conducted in 2013. This follows the release of two new global listed infrastructure indices, by both FTSE and MSCI, and the decommissioning of the UBS infrastructure index series. The focus of this paper is on whether the indices truly capture the infrastructure characteristics many investors are looking for, including low cashflow volatility from long lived assets, inflation protection, and portfolio diversification benefits.
We have again weighed the strengths and weaknesses of these indices against the most common alternative benchmark, being an inflation plus target.
Two years on, the analysis again highlights the significant divergence with regards to the infrastructure ‘purity’ of the indices, their historical volatilities, and their correlations to global equities. There were also considerable differences with regards to the degree of subjectiveness within the index construction processes. However, all the indices we analysed demonstrated relatively weak linkage to inflation, to differing degrees, as compared to typical investor expectations of the asset class.
We believe an infrastructure manager should be focussed on delivering results across the key characteristics of the asset class such as low cashflow volatility, inflation protection and portfolio diversification. Index choice therefore remains an important consideration for investors.
From our review of the indices, we conclude that the new FTSE Global Core Infrastructure 50/50 Index is now the most superior infrastructure index available. It scores strongly across our qualitative assessments of infrastructure purity and historical volatility, correlation and beta. It is as strong as any other infrastructure index from an inflation linkage perspective, and we rate its index construction highly based on its transparent and robust methodology. For investors who would prefer to use an index as their benchmark we would therefore recommend the FTSE Global Core Infrastructure 50/50 Index.
It is the lack of focus on the inflation linkage aspect of all infrastructure indices, which is understandable due to the complexity involved in evaluating this factor, remains a weakness of the infrastructure indices generally, including the new FTSE Index. Our view is inflation linkage is one of the key characteristics of the asset class, and so should be focussed on throughout the investment process. For this reason we believe that an “Inflation plus” benchmark continues to best align managers with the investment objectives of the asset class.
Notwithstanding this, we are very supportive of the development of the new FTSE Global Core Infrastructure 50/50 Index and expect it to play an important role in the industry going forward. We will adopt it for a number of client reporting functions; such as communicating our investment style with investors, discussing portfolio positioning, considering current portfolio risks, evaluating shorter-term performance, and conducting attribution analysis.