A Compelling Investment Opportunity: The Case for Global Listed Infrastructure Revisited

Transcription

1 July 2011 A Compelling Investment Opportunity: The Case for Global Listed Infrastructure Revisited 1. Executive Summary In 2008, RREEF published a white paper, titled The Case for Global Listed Infrastructure that provided a basis for an institutional allocation to the sector. Since then, the world has undergone a sharp economic downturn and turmoil in the financial markets, commonly referred to as the global financial crisis, and transitioned into a recovery phase. During this time, infrastructure gained prominence as nearly half of the fiscal stimulus announced by governments worldwide targeted infrastructure as means to combat severe recession, highlighting the critical role the sector plays in economic growth and development. The past few years have been the ultimate test of the defensiveness of the listed infrastructure sector. In an environment of prolonged volatility and economic uncertainty, infrastructure securities continued to report strong earnings, reflecting the essential nature of its underlying assets. On a five year basis, listed infrastructure produced a higher Sharpe ratio (a statistic used to measure the return per unit of risk) than many other asset classes. From a portfolio perspective, investors can benefit from a listed infrastructure exposure as part of i) a multi-asset portfolio allocation, or ii) a broad infrastructure allocation. To examine the benefits of adding listed infrastructure to a portfolio, we created a mean-variance optimization model based on historical returns for key asset classes and listed infrastructure. Our results indicate that a portfolio with exposure to listed infrastructure can offer the potential for superior risk-reward outcomes over a portfolio without listed infrastructure. Including listed infrastructure as part of a broad infrastructure allocation can yield a number of benefits, including more liquidity, diversification, and flexibility. According to the RREEF Securities proprietary infrastructure universe, the listed infrastructure market is approximately US$3 trillion and can be divided among three categories pure-play, core and broad. This paper primarily focuses on the pure-play segment of the universe, which includes companies that own or operate infrastructure assets that provide essential services to society, including assets within the transportation, energy, water and communication sectors. Pure-play infrastructure companies generate steady cash flows from assets that naturally demonstrate fundamental infrastructure characteristics, including high barriers to entry and inflation-protected income, and the potential for capital growth. Given the strained fiscal position of many governments worldwide, the high cost associated with infrastructure development and maintenance has led to a growing privatization trend. Going forward, listed infrastructure companies should play an increasingly important role in public finance. Compounded by long-term structural drivers of the sector such as changing demographics, growth of emerging markets, and transition to low carbon economies, the case for listed infrastructure is compelling. RREEF America LLC New York Chicago San Francisco 1 P age

2 July 2011 Table of Contents: Page Prepared by: Stella Yun Xu Assistant Vice President I. Executive Summary Overview of Listed Infrastructure Performance Characteristics of Listed Infrastructure Role of Listed Infrastructure Assets in a Multi-Asset Portfolio Listed Infrastructure as Part of a Broad Infrastructure Allocation Conclusion Appendix A: Megatrends and Structural Drivers Index Definitions Risk Disclosures and Important Notes P age

3 2. Overview of Listed Infrastructure In this section, we begin by evaluating the landscape and size of the current infrastructure securities universe. Until recently, unlisted or direct infrastructure investment vehicles have been the primary domain for institutional investors looking to gain exposure to the nascent infrastructure sector. Today, the global listed infrastructure market provides investors easier access to this burgeoning sector. Infrastructure companies generate steady cash flows from assets with attractive characteristics such as high barriers to entry, pricing power and sustainable growth. From 2000 to 2010, the number of listed infrastructure vehicles open for investment grew from 10 to According to Preqin, the majority of listed infrastructure funds launched prior to 2006 were industry specific, with few funds investing in multiple sub-sectors. Since 2006, a number of generalist funds have been launched that invest in a variety of infrastructure sub-sectors. The pure-play segment of the universe is what institutional investors typically target when considering an infrastructure allocation Within the listed infrastructure universe, companies can be classified as pure-play, core and broad. By definition, pure-play companies typically own or operate infrastructure assets that naturally exhibit fundamental infrastructure characteristics, such as high barriers to entry and relatively inelastic demand. Total return for pure-play companies is typically driven by stable and long-term income derived from usage fees. The pure-play segment of the universe most closely resembles the unlisted infrastructure universe and is what institutional investors typically target when considering an infrastructure allocation, and accounts for approximately 30 percent of the US$3 trillion global listed infrastructure market capitalization (see the following exhibit on RREEF s proprietary infrastructure securities universe). Core infrastructure companies, meanwhile, exhibit some fundamental infrastructure characteristics by virtue of regulation or contracted agreement. Many of these companies often have loosely-related infrastructure side businesses. As such, core infrastructure investments may exhibit some fundamental infrastructure characteristics, but have lower margins and are not typically capital intensive or associated with deriving cash flows from long-duration contracts. Finally, the broad infrastructure segment reflects a more thematic interpretation of the sector, including infrastructure-related businesses, such as construction and diversified communications, which can assume some operating risks. Importantly, however, the incremental companies included in the broad definition of infrastructure do not exhibit the relatively stable cash flow that is characteristic of typical pure-play infrastructure. 1 Overview of the Listed Infrastructure Fund Market, 2011 Preqin Global Infrastructure Report, Preqin. 3 P age

4 Global Infrastructure Securities Universe THEMATIC INVESTMENT ASSET INVESTMENT Companies Market Cap ($US Bil) BROAD CORE 171 1,461 PURE-PLAY Engineering & Construction Timber Diversified Operations Power Generation Shipping Infrastructure Services Integrated Utilities Rail Diversified Utilities Diversified Infrastructure Power, Transmission & Distribution Oil/Gas Storage & Transportation Toll Roads Seaports Airports Communications (Towers/Satellites) Water TOTAL 535 Approx. $3 Trillion Sources: RREEF Securities and Bloomberg. As of June There are no guidelines for defining the listed infrastructure universe. Therefore, the construction of benchmark indices is inevitably challenging and it is difficult to develop a formula to identify pure-play infrastructure companies. As such, many infrastructure benchmark indices are exposed to securities with only diluted exposure to pure infrastructure assets. The construction of most indices takes one of two approaches: applying a market capitalization weighting methodology to infrastructure sectors (in which case utilities will always dominate the index) or imposing fairly arbitrary hard caps on these sectors. 2 many infrastructure benchmark indices are exposed to securities with only diluted exposure to pure infrastructure assets. We believe that the Dow Jones Brookfield Infrastructure index is the most appropriate index for investors seeking a pure-play benchmark as it measures the performance of companies that exhibit pure-play infrastructure characteristics. A focus on long-dated cash flows is mandated by the index, as constituents within the index are required to have more than 70% of cash flows derived from pure-play infrastructure lines of business, which is the highest threshold among all indices shown below. Additionally, the index does not enforce arbitrary caps on sectors and analysis shows that it offers the best risk-adjusted return metrics for investors. As such, we will use this index as our listed infrastructure benchmark for the paper. The following exhibits reflect characteristics of the four leading benchmarks within the listed infrastructure universe. 2 Babson, Adam, Structuring a Listed Infrastructure Portfolio, Russell Research, May P age

5 Global Infrastructure Benchmark Comparison Number of Constituents Market Cap (USD millions) Weighting Methodology Infrastructure Inclusion Criteria Infrastructure Segments S&P Global Infrastructure Index 74* 1,026,938 Modified cap weighted, sectors capped at specific weights, single stock max of 5% Largest stocks from selected clusters of GICS Sub-Industries Broad, Core, Pure-play Dow Jones Brookfield Infrastructure index is the most appropriate index for investors seeking a pure-play benchmark UBS Global Infrastructure & Utilities Index Macquarie Global Infrastructure Index Dow Jones Brookfield Infrastructure Index 271 2,445,592 Free-float weighted, single stock max of 10% 248 2,089,929 Free-float weighted ,590 Free-float weighted, single stock max of 10% Greater than 50% of EBITDA from infrastructure or utility assets Must be part of selected ICB sectors and maintain at least 50% of its revenues from infrastructure related activities Greater than 70% of operating cash flows come from the ownership or operation of infrastructure assets; annual test Broad, Core, Pure-play Core, Pureplay Pure-play Note: *Capped at 75 constituents. Sources: RREEF Securities, Standard & Poors, FTSE, UBS, Dow Jones. As of June For illustrative purposes only. Past performance is not indicative of future results. Please see important index definitions at end of presentation. Global Infrastructure Benchmark Comparison Performance Metrics Total Return (Annualized, USD, Net TR) 40% 30% 20% 35.9% 23.2% 30.8% 21.6% 10% 6.0% 8.6% 5.2% 4.7% 4.4% 0% -10% -3.1% -2.2% -4.0% 1 Year 3 Year 5 Year Standard Deviation 25% 20% 15% 12.0% 12.7% 15.0% 12.5% 19.2% 19.1% 23.7% 19.0% 16.7% 16.7% 20.0% 16.6% 10% 5% 0% 1 Year 3 Year 5 Year Sharpe Ratio Year 3 Year 5 Year 0.2 Dow Jones Brookfield Global Infrastructure S&P Global Infrastructure Macquarie Global Infrastructure UBS Global Infrastructure & Utilities Sources: RREEF Research, Standard & Poors, FTSE, UBS, Dow Jones. As of June P age

6 3. Performance Characteristics of Listed Infrastructure In this section, we will examine the general characteristics and performance of listed infrastructure in comparison to other sectors such as unlisted infrastructure, institutional bonds, direct real estate and equities. Key characteristics of listed infrastructure in comparison to various asset classes are highlighted in the following exhibit. General Characteristics of Infrastructure: Investment Access Return Composition Size Asset Availability Liquidity General Annual Return* Unlisted Infrastructure Infrastructure Equities Capital growth in early years, income-dominated at mature stage Mix of growth and income components >US$200 million >Asset scarcity Long term Mature: 7% to 10% Any Amount Established and increasing volumes in most markets Short to long term Typical historical returns of 10%+ Institutional Bonds Institutional Direct Real Estate Set coupon and low growth rate Any Amount Deep volumes in most markets Short to long term 5% to 7% Mixed income and capital appreciation >US$20 million Moderate to deep volumes in most markets Medium to long term Core: 7% to 9% Value-added: 11% to 15% Opportunity: 18%+ Public Equites Mix of growth and income components Any Amount Deep volumes in most markets Short to long term Large possible range of returns Note: *There is no assurance stated returns will be achieved. Source: RREEF Research. As of June While infrastructure securities were not immune to falling returns in the market, their relatively predictable cash flows and high dividend yield demonstrated that it was a defensive sector. The significant market distress which began in July 2007 has been the ultimate test of the defensiveness of the listed infrastructure sector. While infrastructure securities were not immune to falling returns in the market, their relatively predictable cash flows and high dividend yield demonstrated that it was a defensive sector. Listed infrastructure outperformed the broader equity market from a one, three and five year perspective, highlighting the attractive opportunity the sector offers to those looking for a resilient asset class with sustainable growth. A five year standard deviation also shows that the Dow Jones Brookfield Global Infrastructure index exhibited significantly less volatility than global listed real estate. Returns on Infrastructure and Other Major Asset Classes Annualized Returns 5 Year Risk Measures 1 Year 3 Year 5 Year 10 Year Std Dev Sharpe Ratio Stocks MSCI World Index 30.51% 0.47% 2.28% 3.99% 21.90% Bonds Barclay's Capital Global Aggregate Index 10.51% 6.04% 7.10% 7.41% 6.90% Listed Infrastructure Dow Jones Brookfield Global Infrastructure Index 35.90% 5.98% 8.63% NA 19.85% Listed Real Estate FTSE EPRA/NAREIT Developed Rental Index 39.27% 3.96% 1.98% NA 32.15% Private Real Estate NCREIF Property Index* 16.03% -3.63% 3.46% 7.49% 8.15% Note: *Data as of March 31, 2011, for U.S. only. Sources: RREEF Research, Bloomberg, Barclay's Capital Live, NCREIF, Cambridge Associates. As of June 30, For illustrative purposes only. Past performance is not indicative of future results. Please see important index definitions at end of presentation. A look at the Sharpe ratio of various asset classes for a period of five years ending June 30, 2011 shows that global listed infrastructure securities have a higher Sharpe ratio than equities, REITs and even private equity real estate. A high Sharpe ratio is attractive because it equates to a higher return per unit of risk. At the same time, listed infrastructure has shown significantly lower volatility than listed real estate over the past five years (see exhibit on next page). 6 P age

7 5 Year Volatility vs. Return 5 Year Return (Annualized) 10% 8% 6% 4% 2% Barclay's Capital Global Aggregate NCREIF NPI* Dow Jones Brookfield Global Infrastructure MSCI World FTSE EPRA/NAREIT Developed Rental 0% 0% 5% 10% 15% 20% 25% 30% 35% 5 Year Volatility Note: *Data as of March 31, 2011, for U.S. only. Sources: RREEF Research and Bloomberg. As of June 30, Past performance is not indicative of future results. Listed infrastructure has shown operating profit or EBITDA resilience throughout the downturn While infrastructure securities were not immune to falling returns in the market, their relatively predictable cash flows and high dividend yield demonstrated its underlying defensiveness. A key attractive investment characteristic of infrastructure revolves around the security of earnings. Listed infrastructure has shown operating profit or EBITDA (earnings before interest, tax, depreciation and amortization) resilience throughout the downturn due to the regulated/monopoly and essential nature of the underlying assets. As shown in the following exhibit, continued earnings growth and stability delivered during the global financial crisis demonstrated the benefits of allocating to listed infrastructure. In this context, this sector is not as susceptible to business and economic cycles as equities. Annual EBITDA Growth (Local Currency) Global Equities Global Infrastructure Equities 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% E Global Equities = MSCI World Global Infrastructure Equities = Dow Jones Brookfield Global Infrastructure Index. Please see important index definitions at end of presentation. Sources: MSCI, Reuters, Bloomberg, Dow Jones Indexes, and JP Morgan Quantitative Strategy. As of June P age

8 Looking ahead, we expect infrastructure securities to continue to exhibit greater stability than equities. This cash flow stability of listed infrastructure companies has translated into outperformance versus global equities, as evidenced in the following exhibit. Infrastructure securities have outperformed during the global financial crisis that started in June 2008 and the market recovery since March Looking ahead, we expect infrastructure securities to continue to exhibit greater stability than equities. Infrastructure Held Up Better than Equities Indices Indexed to 100 as of 6/1/ Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dow Jones Brookfield Global Infrastructure MSCI World Sources: RREEF Research and Bloomberg. As of June Past performance is not indicative of future results. Please see important index definitions at end of presentation. Additionally, infrastructure transactions have demonstrated significant rating stability through the global financial crisis according to Fitch, the ratings agency. 3 Infrastructure transactions that have suffered due to economic factors have generally seen only modest downgrades. The resilience of infrastructure ratings is mostly due to monopolistic characteristics exhibited by the sector. Fitch, in fact, is not the only ratings agency to note the resilience of infrastructure to economic shocks. In November 2010, Moody s, another ratings agency, found that European infrastructure companies could potentially be resilient to the effects of declining sovereign quality. 4. Role of Listed Infrastructure Assets in a Multi-Asset Portfolio In this section, we examine how listed infrastructure impacts the risk/return relationship within a diversified portfolio. During the global financial crisis, the question of leverage was at the forefront of investor s concerns and correlations rose significantly between equity and many asset classes. Specifically, correlations spiked in the second half of 2008 and have remained elevated since. Correlation in the equity market has traditionally moved in tandem with volatility and fourth quarter of 2008 was one of the most volatile periods in the past century. Investors, in need of cash holdings, perceived listed infrastructure as having high exposure to leverage and sold across the board. Some of the sell-off was due to leverage concerns in certain listed companies that were highly exposed to leverage and a high debt maturity profile. Despite the panic, bankers felt that risk was much lower than what the markets had perceived as evidenced by the $80 billion raised by infrastructure companies from 2007 to Looking ahead, RREEF believes that global recovery will continue to support infrastructure fundamentals in the coming years and that the sector will continue to outperform equities on the back of megatrends and structural drivers boosting the sector. A list of key fundamental drivers that will drive the growth of the listed infrastructure sector is provided in Appendix A. 3 Alves, Bruno, Fitch finds infra ratings resilient to downturn, Infrastructure Investor, March 9, P age

9 2 Year Monthly Correlations between Equities and Listed Infrastructure, REITs, High Yield Bonds and Commodities December 31, 2004 June 30, Correlation Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 MSCI World TR Index & Dow Jones Brookfield Global Infrastructure TR Index MSCI World TR Index & Dow Jones UBS Commodity TR Index MSCI World TR Index & Barclay's Global High Yield TR Index MSCI World TR Index & FTSE EPRA NAREIT Developed TR Index Sources: RREEF Research, Bloomberg, Barclay s Capital Live. As of June 30, portfolios with exposure to listed infrastructure can offer the potential for superior risk-reward outcomes over portfolios without listed infrastructure... To demonstrate the benefits of adding listed infrastructure to a portfolio, we performed a meanvariance optimization model based on historical returns for three sectors on a global level stocks, bonds and listed infrastructure. 4 We created two sets of efficient frontiers with infinite portfolios using more than eight years of returns. An efficient set shows the best risk and return possible from a combination of assets. In Set A, investors can allocate to equities and bonds. In Set B, investors can allocate to listed infrastructure in addition to equities and bonds. Our results indicate that Set B, or portfolios with exposure to listed infrastructure, offers superior risk-reward outcomes over portfolios without listed infrastructure. Based on the high correlations shown between global equities and listed infrastructure in the preceding exhibit, it can be concluded that the increased slope in Set B is primarily due to a substitution of listed infrastructure in lieu of stocks. This type of analysis, however, assumes that past patterns of performance will be repeated in the future. 4 Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material pints which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. 9 P age

10 Historic Portfolio Efficient Frontiers Q % 20% Stocks Efficient & Set Bonds A: Stocks & Bonds Stocks, EfficientBonds Set B: & Stocks, Listed Bonds Infrastructure & Listed Infrastructure Average return 15% 10% 5% 0% 10% 20% 30% 40% Volatility Sample Portfolio Allocations for Efficient Set A (Stocks & Bonds) Stocks Bonds Average Return Volatilty Portfolio 1 16% 84% 8% 15% Portfolio 2 56% 44% 12% 25% Portfolio 3 87% 13% 14% 35% Sample Portfolio Allocations for Efficient Set B (Stocks, Bonds & Listed Infrastructure) Stocks Bonds Listed Infrastructure Average Return Volatility Portfolio 1 0% 84% 16% 9% 15% Portfolio 2 0% 40% 60% 15% 25% Portfolio 3 0% 6% 94% 20% 35% Note: Stocks = MSCI World, Bonds = Barclay s Global Aggregate Bond Index, Listed Infrastructure = Dow Jones Brookfield Global Infrastructure Index. Sources: RREEF Research and Bloomberg. As of June 30, asset classes that have higher Sharpe ratios will substitute asset classes with lower Sharpe ratios in optimization models... To further demonstrate our point, we created three portfolios with 15%, 25% and 35% volatility for Efficient Sets A and B. The exhibit above shows the allocation and return for each of these portfolios upon optimizing for required volatility. Portfolios in Efficient Set B, with listed infrastructure allocation, outperformed portfolios in Efficient Set A, without listed infrastructure allocation at each level of volatility. Set B allocation demonstrates that asset classes that have higher Sharpe ratios will substitute asset classes with lower Sharpe ratios in optimization models. It is important to note, however, that these analyses were performed on an unconstrained basis, meaning that no allocation minimums and maximums were set for each asset class. We acknowledge that it may be impractical for institutional investors to have no exposure to stocks. This analysis is simply meant to demonstrate that investors can achieve enhanced riskreturn outcomes by incorporating listed infrastructure within their portfolios. 5. Listed Infrastructure as Part of a Broad Infrastructure Allocation To assess the benefits of a listed infrastructure allocation, we compare the performance of listed versus unlisted infrastructure in this section and assess the benefits of creating a hybrid allocation. Performance of unlisted infrastructure remains opaque as limited data is available on the private funds. Furthermore, many unlisted funds have a relatively short track record. Mercer, however, has compiled an equally weighted index consisting of open-ended unlisted Australian infrastructure funds with more than 40 assets called the Mercer Equally Weighted Composite Unlisted Australian Index. While this index is reflective of a very limited number of unlisted funds, it is currently the most complete index available. To make the comparison balanced, we compared the Mercer unlisted index against the Dow Jones Brookfield Global 10 P age

11 Infrastructure Total Return Hedge Index in Australian Dollars. We used this particular view of the Dow Jones Brookfield Global Infrastructure Index to ensure a proper comparison because many of the non-australian assets within the Mercer index funds are hedged. The following two exhibits first show the one, three, and five year returns and volatility for the listed versus the unlisted infrastructure indices and second, compares the growth of a dollar invested in a listed fund to a dollar invested in an unlisted fund from December 31, 2002 to June 30, As expected, the listed infrastructure index exhibited higher volatility to its unlisted counterpart over the time frame. On a one and three-year basis, listed infrastructure shows higher returns, while on a five year basis the returns of listed have been modestly below its unlisted cousin. The second exhibit below shows that listed and unlisted infrastructure tend to follow similar growth rates over time with listed infrastructure exhibiting higher volatility. Listed vs. Unlisted Infrastructure Performance Returns 1 Year 3 Year 5 Year Risk Measures, 5 Year 5 Year SD - Quarterly Annualized 5 Year Sharpe Ratio Unlisted Infrastructure* 12.14% 6.29% 10.43% 3.08% Listed Infrastructure** 19.26% 7.89% 9.17% 7.67% Note: * Mercer's Equally Weighted Composite Unlisted Australian Index (AUD). ** Dow Jones Brookfield Global Infrastructure Total Return Index (AUD). Sources: Mercer Manager Performance Analytics, RREEF Research and Bloomberg. As of March 31, Growth of a Dollar Invested in Listed vs. Unlisted Infrastructure Mercer's Equally weighted Composite Unlisted Australian Index (AUD) Dow Jones Brookfield Global Infrastructure Total Return Index Hedged (AUD) Australian Dollar Source: Mercer Manager Performance Analytics. As of March 31, Listed infrastructure can offer the longterm risk/return benefits of the infrastructure sector with the convenience of liquidity The trade-off that is not measured below, however, is the liquidity benefit of listed infrastructure investments. Listed infrastructure can offer the long-term risk/return benefits of the infrastructure sector with the convenience of liquidity, which enables investors to adjust their investment strategies and level of commitment at short notice, an important consideration for many investors during the recent downturn. Investing in listed and unlisted infrastructure is analogous to investing in listed and unlisted commercial real estate. Similar to unlisted infrastructure, unlisted commercial real estate investments are illiquid and tend to require large commitments of capital. Within real estate, many institutional investors, such as endowments and pension funds, allocate to both unlisted and listed strategies to enhance returns, a trend that will likely emerge in the infrastructure market Preqin Global Infrastructure Report, Preqin 11 P age

12 Including listed infrastructure as a complement to direct infrastructure investments within a portfolio can achieve the following benefits: Liquidity: The global financial crisis highlighted the need to consider liquidity as part of an overall investment strategy. An allocation to listed Infrastructure ensures a minimum level of liquidity and enables investors to effectively manage exposure levels to the sector. In a hybrid listed and direct infrastructure portfolio, investors have the option to draw upon the listed allocation to balance portfolios. Diversification: Diversification across regions and sectors may be more easily achieved as investors do not concentrate their allocations in a handful of large assets. Diversification can help mitigate regulatory, demand, interest rate, sovereign and market risks. Flexibility: A hybrid portfolio which includes both listed and unlisted infrastructure investments ensures that there is no pressure to overbid on direct assets just to gain exposure following shifts in asset allocation. Investors have the option of gaining exposure via listed infrastructure until a suitable direct asset is found. Access to iconic assets: Many governments do not permit iconic infrastructure assets to become completely privately owned and would prefer IPOs to trade sales. In this case, investors are only able to access these assets via a listed vehicle. (Example: The city of Hamburg decided on IPO instead of single sale to private investment of Hamburger Hafen und Logistik AG, the operator of Germany s biggest harbor in Fall 2007). Supply and demand arbitrage: Investors who have both listed and direct exposure can avoid high valuation bubbles and take advantage of value troughs created by supply and demand imbalances in the relatively small direct market. Reduced volatility: The difference in the timing of returns between listed infrastructure and direct infrastructure can create an opportunity for diversification that can reduce volatility. Prudent financial structure: Listed infrastructure assets are owned by numerous institutional and retail investors as opposed to a single majority controlling shareholder which translates into less aggressive capital structures and subsequently a lower level of gearing. Active portfolio management in the listed infrastructure sector can generate desirable returns by avoiding unwanted sector and regional concentration. Lower fees: Combining a listed infrastructure allocation within a broader infrastructure strategy can reduce the overall fee that is paid by an institutional investor. Active portfolio management in the listed infrastructure sector can generate desirable returns by avoiding unwanted sector and regional concentration. During times of high market volatility, where a large dispersion of returns exist among stocks, active listed infrastructure managers can outperform benchmarks by allocating to assets that exhibit core infrastructure characteristics to yield a desired beta exposure within their portfolio. A portfolio with only unlisted infrastructure exposure is more rigid as shifting the portfolio can be difficult. In the listed space, managers can allocate capital by region or sector and maximize value by matching investments to various points along an economic cycle. 12 P age

13 6. Conclusion a pure-play strategy has the potential to provide strong riskadjusted returns compared to major asset classes In the wake of the global financial crisis, investors have become increasingly multi-dimensional in defining risk, prompting many to be more discerning in their asset allocation strategy. RREEF believes that a pure-play investment approach within listed infrastructure meets this higher standard for asset allocation. Based on the empirical evidence shown in this paper, a pure-play strategy provides strong risk-adjusted returns compared to major asset classes, notably global equities. In addition, listed infrastructure significantly enhances broader infrastructure allocations with higher performance, improved liquidity, greater diversification, and more flexibility. Going forward, investors should consider a listed infrastructure allocation as the global political, financial, and economic backdrop continues to support the need for private investment in public infrastructure. 13 P age

14 7. Appendix A: Megatrends and Structural Drivers global demand for infrastructure services is soaring on the back of structural drivers... Long-term global demand for infrastructure services is soaring on the back of structural drivers. The following are key fundamental drivers that will drive the growth of the listed infrastructure sector: Demographics: Increasing population and urbanization will generate enormous economic infrastructure, resource, housing and power supply demand. Emerging markets growth: There are considerable infrastructure requirements in emerging economies. Investors, however, should be wary of risks involved in investing in markets with less developed legal, political and regulatory institutions. Historical underinvestment in developed markets: Investment opportunities are skewed towards mature infrastructure assets in developed markets. America s infrastructure received a D grade point average. The American Society of Civil Engineers projects the cost of repairing U.S. infrastructure has grown to US$2.2 trillion for over the next five years. Transition to low carbon economies: Carbon pricing will have a profound impact on the growth prospects of different modes of transport. Energy security concerns will also motivate countries to seek new distribution channels, energy supply pipelines, storage facilities and ports. Financing shift: Mounting fiscal pressure in countries worldwide has accelerated the privatization schedule of valuable infrastructure assets. As part of the effort to pay down debt, many cash-strained governments plan to raise money by selling infrastructure assets. The private sector has, therefore, assumed a greater share of funding and maintenance of critical assets and this trend will likely accelerate. The following exhibit shows current fiscal deficit and GDP growth for major economies. Economic Pressure to Privatize 4% South Korea 2% Switzerland 2011 Fiscal Balance % of GDP 0% -2% -4% -6% -8% -10% Japan Italy Spain Mexico Germany Brazil Australia Canada Russia Netherlands Poland France United Kingdom United States Indonesia Turkey India China -12% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 2011 Real GDP % Growth Sources: RREEF Research and Global Insight. As of June Inflation hedge: Inflation protection has gained importance after governments around the world injected significant amounts of money into the economy to prevent a depression. Regardless of whether or not inflation fears prove to be founded and to what degree, it is important for long term investors to have adequate exposure to inflation linked assets. The essential nature of infrastructure assets was highlighted by the fact that nearly half of the fiscal stimulus announced by governments worldwide to combat the global financial crisis was directed to infrastructure. The total amount of fiscal stimulus announced globally was 14 P age

15 approximately US$2.7 trillion. The following exhibit highlights key government infrastructure stimulus plans. Much of the stimulus-related spending focused on Greenfield investment opportunities. For retail investors, however, the benefits from such projects, such as renewable energy, may appear only in the mid-term. Government Infrastructure Stimulus Plans U.S. $bn Sources: Foreign Affairs and International Trade Canada. As of December Overall, we expect to see more listed investment opportunities as a result of growing reliance on the private industry for infrastructure services and increased investor awareness of the sector and its benefits. 15 P age

16 8. Index Definitions Dow Jones Brookfield Infrastructure Index The index aims to measure the stock performance of companies worldwide that are owners and operators of infrastructure assets. To be included in the index, a company must have more than 70% of estimated cash flows (based on publicly available information) derived from the following infrastructure sectors: Airports; Toll Roads; Ports; Communications; Electricity Transmission & Distribution; Oil & Gas Storage & Transportation; Water; and Diversified (multiple sectors). UBS World Infrastructure & Utilities Index This is a free float-adjusted, market capitalization-weighted index designed to track the performance of globally listed infrastructure. The Index was started in 2006 and has a backfilled history to It is divided into several sub-components including: UBS Global Infrastructure Index This is a free float-adjusted, market capitalization-weighted index designed to track the performance of non-utility related global listed infrastructure (transportation & communication). UBS Global Utilities Index This is a free floatadjusted, market capitalization-weighted index designed to track the performance of global utility companies (excluding sub-sector generation utilities). S&P Global Infrastructure Index The index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy. Macquarie Global Infrastructure Index The Macquarie Global Infrastructure Index (MGII) is based on stocks from the FTSE Global All Cap Index that have an infrastructure/utilities bias. The index has been developed to allow asset managers and investors to benchmark infrastructure performance on a global basis. 9. Risk Disclosures and Important Notes Copyright 2011 Deutsche Bank AG, Frankfurt am Main. All rights reserved. RREEF is the brand name of the real estate division for the asset management activities of Deutsche Bank AG. In the US this relates to the asset management activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management (Australia) Limited (ABN ) Australian financial services license holder; in Japan: Deutsche Securities Inc.*; in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for Direct Real Estate business), and Deutsche Asset Management Hong Kong (for Real Estate Securities Business); in Singapore: Deutsche Asset Management (Asia) Limited (Company Reg. No N); and in the United Kingdom: Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset Management (Global) Limited, and Deutsche Asset Management (UK) Limited; and in Denmark, Finland, Norway and Sweden: Deutsche Alternative Asset Management (UK) Ltd and Deutsche Alternative Asset Management (Global) Ltd; in addition to other regional entities in the Deutsche Bank Group. (*) For DSI, financial advisory (not investment advisory) and distribution services only. Key RREEF research personnel are voting members of various RREEF investment committees. Members of the investment committees vote with respect to underlying investments and/or transactions and certain other matters subjected to a vote of such investment committee. Additionally, research personnel receive, and may in the future receive incentive compensation based on the performance of a certain investment accounts and investment vehicles managed by RREEF and its affiliates. This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute Deutsche Bank AG or its affiliates judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer. An investment in real estate involves a high degree of risk and is suitable only for sophisticated investors who can bear substantial investment losses. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. I P age