The MSCI Private Infrastructure Factor Model

Preview

Private infrastructure’s growing appeal among institutional investors is based on the promise of a strong, steady yield coupled with low volatility and correlation with the market. However, the asset class’s name itself suggests significant challenges to the investor: “Private” implies opaque and illiquid investment vehicles whose artificially smooth returns can conceal significant systematic risk, while the blanket term “infrastructure” masks considerable heterogeneity in risk and return within the asset class.

In fact, private infrastructure investments span the spectrum from the equivalent of high-quality municipal bonds to risky early-stage venture equity. Yet private infrastructure investments are often proxied by investment-grade corporate bonds for portfolio construction and risk purposes. The recent performance of infrastructure calls this approach into question. Impacted by the COVID-19 crisis, U.S. private infrastructure funds in the energy sector lost 6.9% and transportation funds lost 6.1% on an unlevered basis in the first half of 2020. For context, the MSCI USA Investable Market Index lost 25% and the MSCI USD Investment Grade Corporate Bond index gained 5.65% in the same period. A naïve proxy approach compromises the accuracy of modeling both by representing highly dissimilar assets by their average and by misidentifying systematic risk factors.

The MSCI Private Infrastructure Factor Model offers the investor an innovative solution to the twin challenges of “private” and “infrastructure.”