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The Connection Between Population Structure and Returns on Infrastructure Investments

Douglas Andrews                     Jaideep Oberoi
Stephen Bonnar                       Aniketh Pittea
Lori Curtis                                  University of Kent
University of Waterloo


Executive summary

Infrastructure is an important asset class in any balanced portfolio. It provides many attractive features including inflation-adjusted cash flows and diversification. The infrastructure itself also provides benefits to the communities it services. The amount of value created will have a dependence on the demographics of the area it serves.

The analysis in this paper follows the approach taken by Ammar and Eling (2015)[1] in examining specific sectors of the U.S. equity market as a proxy for infrastructure investments. It then uses the approach taken by Ang and Maddaloni (2005)[2], who analyze international equity returns, in order to examine the relationship between demographic structure and infrastructure returns.

Main Findings:

There is a significant relationship between demographic structure and infrastructure returns:

  • a one standard deviation increase in the working-age population is associated with a 3.8% increase in infrastructure returns
  • a one standard deviation increase in average age population is associated with a 2.9% decrease in infrastructure returns
  • a one standard deviation increases in the population proportion that is over 65 is associated with a 5.6% increase in infrastructure returns

Conclusion

There is a significant relationship between demographic structure and infrastructure returns; this relationship is stable over time, but was overwhelmed by the impact of the 2008/2009 financial crisis and 2010-2012 Euro crisis; and there are no significant relationships (at the 5% level) for any other sectors of the equity market, with the exception of the Healthcare sector.

[1] Ammar, S. B. and M. Eling (2015). Common risk factors of infrastructure investments. Energy Economics 49, 257–273.

[2] Ang, A. and A. Maddaloni (2005). Do demographic changes affect risk premiums? Evidence from international data. The Journal of Business 78 (1), 341–380.