The characteristics of infrastructure as an investment class
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The characteristics of infrastructure as an investment class Wouter Thierie1 · Lieven De Moor1
Published online: 19 July 2016 © Swiss Society for Financial Market Research 2016
Abstract There is an enormous need for infrastructure investment. Although institutional savings has shown strong growth in the OECD countries since the mid-2000s, only a small proportion of institutional assets is allocated to infrastructure. Relatively little is known about the characteristics and risk–return profiles of infrastructure assets, making institutional investors reluctant to step up investing in this type of asset. There is a wide heterogeneity in risk–return characteristics across sectors, regions, and stage of development, creating an uncertainty that explains why the flow of funds from institutional investors toward infrastructure does not reach its full potential. However, infrastructure provides significant diversification benefits that justify increased investment. Moreover, the financial crisis led to a growing interest in infrastructure as a tool for portfolio diversification among various asset classes. The goal of this paper is to review the characteristics of infrastructure as an investment class. The paper will be useful for academics looking for topics of research in the field, and will be of practical use to institutional investors considering infrastructure investment opportunities. Keywords Infrastructure · Portfolio diversification · Asset allocation · Institutional investor · Pension fund · Risk return · Life cycle · Investment opportunity JEL Classification G11 · G23 · G24
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Lieven De Moor [email protected] Wouter Thierie [email protected]
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Faculty of Economic and Social Sciences and Solvay Business School, Vrije Universiteit Brussel, Pleinlaan 2, 1050 Brussels, Belgium
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W. Thierie, L. De Moor
1 Introduction There is an enormous need for infrastructure investment. Since government investment levels have been declining in most OECD countries since the 1980s, these countries are now facing an aging infrastructure that needs to be replaced. In addition, trends such as population aging and climate change are driving up demand for infrastructure around the world. McKinsey Global Institute (2013) estimates that, worldwide, USD 57–67 trillion will be needed to be invested in infrastructure by 2030, a figure that ignores social infrastructure. In Europe, the European Commission (2013) estimates an overall infrastructure need above EUR 2 trillion between 2013 and 2020. Due to the financial crisis, investing in infrastructure has become even more urgent. The sector could play a critical role in the economic recovery as the multiplier specifically for infrastructure investment is assumed to be larger than that for other types of investments IMF (2014). Several studies highlight the key role of infrastructure in an economy. Adequate infrastructure is a driver of a region’s comparative advantage (Yeaple and Golub 2004), economic growth (Röller and Waverman 2001; Prud’homme 2005; Sharma 2006;
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