Was Infrastructure Solid During COVID-19?

• Infrastructure, like real estate, is a tangible, income-producing alternative asset class with a variety of asset types and holding structures that has not been spared the impacts of the COVID-19 pandemic.
• The return of private infrastructure assets held up better than their listed equivalents, though risk levels remained elevated.
• Transport infrastructure, directly impacted by pandemic-enforced travel restrictions, performed poorly and drove down the overall return of the MSCI Global Quarterly Private Infrastructure Index in the first half of 2020.

Imagine a world without infrastructure — no electricity, water, roads, airports or cellphone signal. Modern society’s economic productivity is facilitated by infrastructure investments. It’s a virtuous cycle in which it can help stimulate long-term economic growth, which in itself creates the need for more infrastructure investments.

As a result, the infrastructure asset class has grown significantly over the past decade. As of June 30, 2020, USD 403.3 billion had been raised by private-capital infrastructure funds since inception, with over USD 210 billion of that amount raised in the last five years, according to data from the Burgiss Manager Universe (BMU).¹

Much like real estate, another tangible alternative asset class, however, it has not been spared the impacts of the COVID-19 pandemic. Though returns improved in the second quarter, year-to-date performance was negative, and some investors may be wondering whether the asset class’s virtuous cycle has been broken. While that remains to be seen, a closer look across infrastructure investment types, as well as subsectors and risk levels of private infrastructure investments over time, may provide a useful perspective as private-capital firms and their investors manage through the pandemic.

Infrastructure Investments Were Not All Built the Same

The pandemic impacted the returns of infrastructure investments, whether investors were exposed to assets directly, through pooled closed-end funds or via public companies. The MSCI Global Quarterly Private Infrastructure Index, a measure of asset-level performance, returned -3.3% for the six months ended June 2020. A 3.3% dip in the first quarter, incorporating the initial reaction to the pandemic, was followed by a 0% return in Q2. But that doesn’t tell the whole story.

Pooled infrastructure funds, which like private-asset indexes incorporate an element of appraisal smoothing, returned -2.6% for the first half of 2020, according to Burgiss. Though these funds suffered a sharper fall (-4.9%) in the first quarter, they rebounded more strongly than infrastructure assets did in Q2, returning 2.3% for the three-month period.

The MSCI World Infrastructure Index represents companies owning and operating infrastructure assets, and has relatively high exposure to communication firms. The MSCI World Core Infrastructure Index consists of companies engaged in core industrial infrastructure activities and has a sector allocation more closely aligned to the MSCI Global Quarterly Private Infrastructure Index. Both listed-company indexes are more volatile than their private counterparts, in part due to their exposure to broad equity-market dynamics and absence of appraisal smoothing. And both suffered strong drawdowns in the first quarter (-16.3% and -16.9%, respectively), but also enjoyed significant rebounds in Q2.

Riding in the middle was a hybrid approach designed to simulate an index with liquidity similar to that in listed indexes but with performance and volatility characteristics closer to those of the private indexes. We started with the MSCI World Core Infrastructure Index and incorporated a low-volatility tilt and an index of short-term inflation-protected bonds matched to the leverage levels among the constituents. We refer to this as the “Simulated MSCI World Liquid Core Infrastructure Index” in the exhibit below. 

Total Return and Allocations: Private, Public and Hybrid Infrastructure Indexes

All returns are denominated in local currency. Source: MSCI, Burgiss

Subsector Performance Differed Within Private Assets

To better understand the impact of COVID-19 on infrastructure assets, we looked at the contribution of the underlying sectors to the MSCI Global Quarterly Private Infrastructure Index’s aggregate return.

Unsurprisingly, transport infrastructure assets, directly impacted by pandemic-enforced travel restrictions, drove down the overall return of the MSCI Global Quarterly Private Infrastructure Index in the first half of 2020. Transport infrastructure returned -5.0% and underperformed relative to water utilities (-4.4%) and power (-1.9%).³ Transport’s underperformance, combined with its significant index weighting relative to water utilities and power, resulted in a strong, negative-weighted contribution to the total return.

Sectors’ Weighted Contribution to Total Return

Another reason for transport’s underperformance lies in airports, which are 91.4% uncontracted assets by value. Airports and other uncontracted assets are inherently more exposed to the real economy than contracted ones. For the six months to June 2020, uncontracted assets saw returns slide by 6.7%, while contracted assets' returns were only marginally negative (-0.2%). Transport assets and airports comprised 66.1% of all uncontracted assets, while power and water utilities accounted for 67.0% of contracted assets.

Airports, and Other Uncontracted Assets, Underperformed

Source: MSCI

Returns Rebounded but Risks Remain

We next looked at portfolio risk based on the sector weightings of the MSCI Global Quarterly Private Infrastructure Index using the MSCI Private Infrastructure model in MSCI’s BarraOne®. We found that while the return of infrastructure assets did stabilize in Q2, the risk associated with these returns remained elevated into the third quarter.

The index started the year with an estimated risk of 3.1%, based on the weightings of the underlying subsectors. Within the space of two months, the risk estimate nearly doubled to 5.8% as the impact of COVID-19 began to filter through the global economy. Estimated risk remained elevated through the end of September, dropping slightly to 4.9%. Here again, we saw a difference with contracted assets. While the estimated risk of all infrastructure assets increased by the same level (120 basis points (bps)) from February to March, the estimated risk of regulated and contracted assets declined by 70 bps between March and September. During the same period, assets not regulated or contracted saw only a 20-bp improvement.

Risk of the MSCI Global Quarterly Private Infrastructure Index Was Elevated for Most of 2020

Did COVID-19 Turn Infra Red?

Infrastructure is a complex and varied asset class with a variety of options for investors to gain exposure, and COVID-19 presents risks and opportunities across the spectrum. With year-to-date performance in the red through June 30 and risk levels elevated, investors have reason to dig deep into the drivers of risk and return and wonder whether infrastructure’s virtuous cycle has ended, or, like so much during this pandemic, simply paused.

The authors thank Vishad Bhalodia, Yang Liu and Sheng Yao, as well as Keith Crouch from the Burgiss team, for their contributions to this blog post.

¹The Burgiss Group LLC provides the BMU. As of January 2020, MSCI is a minority shareholder in Burgiss.

²We used the MSCI Volatility Tilt Factor Index methodology to incorporate the low-volatility tilt and the Markit iBoxx TIPS Inflation-Linked 1-5 Year Index to deleverage and smooth the listed index.

³The power subsector includes assets related to power generation and transmission and renewable energy.

Further Reading 

MSCI Core Infrastructure Indexes Methodology

MSCI Infrastructure Indexes Methodology

'Nowcasting’ private equity in the coronavirus crisis