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Unique Asset Class
In light of the key differences between the infrastructure and utilities sectors, a growing number of investment professionals are beginning to treat infrastructure as a separate asset class. The rationale behind this decision is simple. First, infrastructure historically has a different risk-return profile than traditional asset classes, and a relatively low correlation with many segments of the market. Second, its characteristics substantially differ as measured by fundamentals such as beta and dividend yield. Third, infrastructure stocks may behave differently from other stocks in how they respond to changes in interest rates.
Risk/Returns
In terms of a risk/return profile, infrastructure has shown strong performance relative to traditional asset classes. In Figure 6, we examine the 5- year performance of infrastructure versus other traditional asset classes: U.S. stocks, foreign stocks, the broad bond market, commodities, and the "risk-free" returns available from 3-month Treasury bills. In three of the past five years, infrastructure posted the highest returns of the asset classes studied. This performance gap was particularly pronounced in 2006 and 2004, when infrastructure outperformed all other measured asset classes by nearly 10 percent.
Beyond establishing differentiated performance, it is worth noting infrastructure's returns-based characteristics. Over the past five years, infrastructure has shown a significantly higher Sharpe ratio compared to the other measured asset classes.
Correlations
The reason investors seek out different asset classes, of course, is to create a diversified portfolio that can weather a downturn in any particular market. Towards this end, the key to the usefulness of any asset class lies in having low correlations to other assets.
Figure 8 compares the correlations of the six studied asset classes over the past five years. Over this time frame, infrastructure has shown low correlations to both U.S. and international equities.
It's worth noting that many investors consider exposure to foreign stocks a significant portfolio diversifier. The figure below shows that, over the past five years, U.S. and foreign stocks have had a correlation of 0.9; by comparison, the correlation of infrastructure and US stocks is just 0.6.
We should also note that the S&P/Citigroup US Utilities index had similar correlations ratios as the infrastructure space. Because of infrastructure's superior performance dynamics, however, we consider it a better diversifying tool.
In addition, infrastructure has demonstrated low correlations to fixed income, as measured by the Lehman US Aggregate Bond Index. This correlation implies that infrastructure may perform differently from traditional equities which exhibited modest negative correlations to fixed income.
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