During an IFM Investors Investment Committee meeting in 2010, there was active debate about a pressing issue: what should the portfolio concentration limits be for various infrastructure sub-sectors, such as utilities or roads?
What was immediately apparent to all in the discussion was that the characteristics of various assets within a particular sub-sector, such as roads, can vary significantly. So what was required was a deeper understanding of the drivers and risks
of various revenue streams associated with each asset.
The IFM infrastructure investment team took on the task of developing a detailed rationale for what asset and revenue stream allocations could produce optimal, robust equity returns. The result was a year-long project that aimed to quantify what
constitutes a balanced, core infrastructure portfolio.
We convened a team made up of IFM’s own infrastructure professionals, several of our in-house quantitative equities specialists and a respected professor in the field of Applied Finance and Financial Risk Management. This team spent a year
researching and designing a portfolio construction methodology, culminating in the launch of InFRAMETM in mid-2011.
InFRAME comprises a suite of risk management and portfolio construction tools, based on the analysis of the underlying revenue streams that drive the performance of infrastructure assets. Its objective is to deliver more accurate portfolio-wide
perspective of risk, based on a bottom-up assessment of the risk exposures and characteristics of underlying assets.
The benefits we believe InFRAME provides include:
- a deeper understanding of the revenue drivers of infrastructure assets and the risks that our investments and infrastructure portfolios are exposed to;
- quantitative insights into the way infrastructure assets, and the sub-sectors to which they belong, respond to macroeconomic drivers and scenarios; and
- greater awareness of the value of targeting a strategic asset allocation for infrastructure based upon the revenue characteristics of the underlying assets.
The results of InFRAME are routinely included in IFM Investors’ decision-making processes and have become powerful tools for our infrastructure investment team. Not only can InFRAME enable investment professionals to better understand the
risks posed by a particular asset, it aids in the search for long term, resilient portfolio performance.
InFRAME in action
The benefits of InFRAME’s approach can be illustrated by the COVID-19 experience. Over the course of 2020, as the pandemic triggered recessionary conditions, there were potential benefits for infrastructure
portfolios that had revenue diversification. While most ‘patronage’ revenue streams are GDP-linked, there is a track record of counter-cyclical performance from fuel storage assets. Fuel storage revenues fall into the ‘market’
category, but they are classified as ‘market defensive’ as they tend to benefit when economic demand is weak and the fuel market takes on a ‘contango’ structure. In such situations, fuel market participants tend to
drive up the price and utilisation of uncontracted storage capacity as they seek to store fuel that is expected to be more valuable in the future. This provided clear diversification benefits in a portfolio that also include aeronautical revenue
streams at airports, for example, which have been affected by both the health effects and the economic crisis associated with pandemic.
What is perhaps most notable about the InFRAME methodology is that although it is regularly reviewed, very little of its core suite of analytical tools have changed since it was first launched in mid-2011. We believe this is largely due to the
long-term investment horizon and open-ended structure of our existing infrastructure strategies being well suited to InFRAME’s design.
To this day, we believe InFRAME continues to provide investment insight and differentiates our approach from others in the marketplace.
More information on InFRAME is available here.