Infrastructure: a new dimension of real estate? An asset allocation analysis

The purpose of this paper is to provide conclusive evidence that infrastructure constitutes a separate asset class and cannot be classified as real estate from an investment point‐of‐view. Furthermore, optimal allocations are determined for direct and indirect infrastructure within a multi‐asset portfolio.

Portfolio allocations are optimized by using an algorithm, which accounts for downside risk, rather than variance. This approach is more in accordance with the actual investor behaviour and might meet their investment objectives more effectively. An Australian dataset comprising stocks, bonds, direct real estate, direct infrastructure and indirect infrastructure is applied for portfolio construction.

Although infrastructure and real estate have common characteristics, the conclusion is that that they constitute two different asset classes. Furthermore, the diversification benefits of direct and indirect infrastructure within multi‐asset portfolios are highlighted and determine efficient allocations up to 78 percent for target rates of 0.0 percent, 1.5 percent and 3.0 percent quarterly.

The results will help investors and portfolio managers to efficiently allocate funds to various asset classes. Most institutional investors are not familiar with investments in infrastructure. The study facilitates a better understanding of the asset class infrastructure and yields some important implications for the optimal allocation of infrastructure within institutional investment portfolios.

This is the first study to examine the role of direct and indirect infrastructure within a multi‐asset portfolio by applying a downside‐risk approach.