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    Infrastructure return correlations vs. other asset classes: effects on the efficient frontier and portfolio diversification
    Correlations are very low between private infrastructure and other asset classes. Including infrastructure debt in a fixed income portfolio favourably shifts the efficient frontier

    Winter 2016 / 2017

         November 2016

    As an asset class, infrastructure has specific characteristics investors can take advantage of when analyzing and managing their portfolios. When deployed within a diversified set of investments, the asset class has the ability to help investors significantly improve the overall risk-return efficiency of their portfolios.

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    Sharpe Ratios for infrastructure debt, infrastructure equity and corporate credit
    Risk-adjusted returns of infrastructure debt are significantly better than infrastructure equity and leveraged loans

    Autumn 2016

         October 2016

    The Sharpe Ratio of Sequoia Economic Infrastructure Income Fund (SEQI), as a proxy of infrastructure debt, is calculated to be 0.82 vs equity at 0.35 and leveraged loans at 0.16. This shows 2.3x as much return per unit of risk as equity and 5.1x as much as leveraged loans. This is largely due to lower return variability of infrastructure debt vs infrastructure equity and lower returns for leveraged loans.

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    Infrastructure debt pairwise asset correlations
    Asset correlations are lowest for funds that invest in different regions, countries and sectors. They are highest for funds that invest in one country or sector

    Summer 2016

         May 2016

    Moody’s October 2013 study shows the pairwise asset correlations they use for rating structured finance transactions backed by infrastructure debt. Below are findings that pertain to Sequoia Economic Infrastructure Income Fund and other infrastructure debt fund strategies. Infrastructure debt also has less asset correlation than leveraged loans.

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    Rating volatility and rating drift of infrastructure vs corporates
    Infrastructure ratings are much less volatile than corporate credit ratings and significantly outperformed corporates during the recent crises

    Spring 2016

         March 2016

    Global infrastructure ratings are only one-third as volatile as corporate ratings. During the financial crisis of 2007-08, the global recession of 2008-09 and the ongoing European sovereign debt crises of 2009-present, corporate downgrades were 6x as great as infrastructure downgrades. This shows that infrastructure ratings are much less susceptible to banking crises and economic downturns.

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    Equity betas for listed infrastructure funds
    The share prices of listed infrastructure funds demonstrate very low volatility vs the equity market as a whole. Unsystematic risk accounts for almost all of the total risk.

    Winter 2015 / 2016

         December 2015

    Equity betas of listed infrastructure funds are very low which reflect the stable cash flows and low asset betas of the underlying projects. Ninety-eight percent of the volatility is from unsystematic risk due to the sector's low correlation to the business cycle. Portfolio risk from infrastructure debt can be diversified away more easily than portfolio risk from leveraged loans, where there is higher systematic risk.

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Sequoia Investment Management Company specializes in infrastructure debt asset management

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