Infrastructure Portfolio Diversification and the Recent Financial Crisis

Portfolio diversification has been fundamental to investment management over the past 40 years, but the benefits have been questioned during times of market stress or crisis. During the recent financial crisis, the return correlations of many risky asset classes drifted towards 1. 00, lessening the perceived benefits of diversification at a time it was most needed. Even infrastructure assets, which are supposed to provide stable, if unspectacular long-term returns, were not immune to the downturn as return volatility and correlations increased during the crisis. Using monthly return data covering the period from March 2001 through June 2009, correlations in excess of 0. 90 were observed between global equity and infrastructure indices following the onset of the financial crisis in 2007. Despite the increased return correlations of infrastructure investments, this study found support for the claim that infrastructure assets provided diversification benefits in the form of higher Sharpe Ratios and greater return dispersion during the recent financial crisis. Investors should expect to receive diversification benefits by including infrastructure assets in an investment portfolio during both peaks and troughs in the economic cycle.