In the early 1950s, at Pennsylvania’s Swarthmore College, a researcher named Solomon Asch conducted a seemingly straightforward experiment. He asked volunteers to study three straight lines and state which was the closest in length to a fourth.

Unaware that many of their fellow subjects had been primed to answer incorrectly, a third of those who took part gave a response that was obviously wrong. Afterwards, asked why they had ignored the incontrovertible evidence before their eyes, most said they were afraid to differ from the consensus¹.

Today, more than three quarters of a century later, Asch’s work stands among the most celebrated in the field of conformity and groupthink. I increasingly wonder whether the sort of bizarre effect he highlighted is now rife in the sphere of private markets.

Take global infrastructure. Much of the appeal attached to unlisted assets in this arena stems from the implication that these holdings are essentially – or at least comparatively – immune to the perils of volatility.

Many investors appear content to accept this suggestion. Like Asch’s unwitting participants, they simply go with the flow. This is a key feature of what we might call the cult of private markets.

Yet it’s an idea that doesn’t reflect reality. Like the line that actually wasn’t anywhere near the length it was said to be, it amounts to an illusion – or, more accurately, a delusion.

The phenomenon has memorably been described as “volatility laundering”². My colleagues and I refer to it as “the volatility mirage”. It’s an issue that warrants investors’ attention, because it risks obscuring the myriad opportunities that exist in the realm of publicly listed infrastructure.

Illusion versus logic

Unlike their unlisted peers, listed infrastructure assets are subject to live valuation. As a result, their daily returns are likely to look more variable over the short term.

Should this set alarm bells ringing for investors? Not necessarily. It could be argued that whether an infrastructure asset is listed or unlisted has nothing whatsoever to do with its value, which is instead more likely to be determined by long-term cashflows and regulated, protected and contracted revenue.

By way of illustration, let’s imagine we buy two nodding dogs. We place the first in the rear window of a clapped-out Austin Allegro from the 1970s and the second in the rear window of a brand-new Bugatti Tourbillon.

How might each be affected by subsequent twists and turns in the nodding dog market? Logically, it shouldn’t matter a jot that one is conveyed in a rust-riddled relic of the British Leyland era and the other in a state-of-the-art hypercar. They should be impacted equally.

I perhaps ought to stress at this stage that the point here isn’t to liken one type of infrastructure fund to a decrepit Allegro and another to a sparkling Bugatti. No such aspersions are being cast.

The aim is instead to make clear that the asset, not the vehicle in which it resides, is what really counts. In other words, anything that influences the economics of infrastructure will do so in listed and unlisted markets alike.

Some investors are only too quick to accept claims to the contrary. But they do so at the potential expense of ignoring listed infrastructure’s significant attractions.

Benefiting from the mirage

None of this is to infer those who succumb to the volatility mirage are stupid or even particularly susceptible – less still that they’re cult members. Sadly, herd mentality has long been an easy trap to fall into in investment circles.

Yet an interesting irony is now at play here. The mirage seems to have been so effective, so strangely compelling, that investors in listed infrastructure can take advantage of it.

With demand for private assets rising, listed assets are trading at a notable “volatility discount”. In fact, they stand at an absolute and relative low in valuation – in part because of the bigger picture around performance.

Global listed infrastructure has tended to deliver greater cashflow growth than global equities over extended periods. But in recent years, beginning with the advent of the COVID-19 pandemic, it has fallen behind.

Although it’s by no means an infallible guide, history strongly indicates a return to outperformance can be expected over the longer term. This means now could be a good time for both tactical and strategic allocations in this space.

More general considerations when weighing listed infrastructure against its unlisted counterpart might include increased liquidity, scope for active position sizing and flexibility to react to macroeconomic developments. These and other factors are consistently overlooked in the rush towards the private side of the divide.

Ultimately, listed and unlisted infrastructure alike can play a role in portfolios. Each can offer diversification, stability, inflation mitigation and growth. This is why investors should give due thought to both and avoid misleading narratives. As Solomon Asch remarked: “The human mind is an organ for the discovery of truths rather than of falsehoods.”

Tim Humphreys is co-manager of the IFSL Marlborough Global Essential Infrastructure Fund.

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¹ See, for example, British Psychological Society: “The line between conformity and resistance”, December 9 2014 – https://www.bps.org.uk/psychologist/line-between-conformity-and-resistance

² See, for example, Asness, C: “Why does private equity get to play make-believe with prices?”, January 6 2023 – https://www.institutionalinvestor.com/article/2bstqfcskz9o72ospzlds/opinion/why-does-private-equity-get-to-play-make-believe-with-prices

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.