Clear thinkers win BUSINESS
40 | ALTERNATIVES WORDS | Daniel Kiernan
wide range of different interpretations. They can encompass everything from hedge funds to stamp collections. With this in mind, perhaps the most sensible starting point is to defi ne alternative investments by what they are not. Alternative investments are not the more commonly held assets that we have been familiar with over the years such as stocks, shares, cash, property funds, bonds or fi xed income products. I like to think of them like this: “alternative investments are directly held non-regulated investments into tangible assets.”
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Benefi ts of Alternatives Actually, alternative investments are nothing new and both institutional investors and high net worth individuals have long had access to alternative markets. In fact, a recent report by Cap Gemini and Ernst and Young estimates that the rich put 10% of their wealth into alternatives. There are two reasons why they do this: diversifi cation and performance. As an overseas property agent, you are going to have clients who are interested in safe ways to achieve both of these outcomes right now.
Diversifi cation Diversifi cation is the strategy of spreading your wealth across a range of assets to reduce the risk of being over- exposed in any one area. If the majority of your wealth is in the property market or the stock market, and these markets do badly, it will have a big impact on your fi nancial wellbeing. If your wealth is spread across several asset classes, a downturn in one area can be offset by strong performance in another. A more common way of thinking about
s there is no offi cial defi nition of alternative investments, it’s a term that can be open to a
diversifi cation is “don’t put all your eggs in one basket.” And what many investors came to realise after the market turmoil in 2008 and subsequent recession was that a lot of the assets they held were correlated – when one market performed badly, they all did. For example, many people’s wealth and assets are allocated like this: • Shares and bonds (most pensions are invested this way);
• Property (home ownership); • Cash (savings in bank accounts and other types of saving schemes.) In the crash of 2008, all of these investments performed poorly at the same time. It’s clear that for many people, further diversifi cation is needed ... and alternatives are the perfect tool. Chart 1 below compares how a portfolio of commonly held assets would have performed through the crisis ... with and without a 40% allocation to alternatives.
Conventional thinking was really challenged by the events in 2008 and
people have been forced to question their assumptions. For instance, nobody expected or predicted that banks would totter and stock market giants like Lehman Brothers would fail. Governments have done much to stabilise the markets and global economy since 2008, but many investors still feel uncertain about the economy and the markets. A sensible conclusion is to make sure that your client has an allocation to alternatives at all times.
Performance
Alternatives also hold out the prospect of enhanced returns. Alternatives such as gold, forestry or farmland have outperformed the stock market and the vast majority of managed funds over the last 10 – 15 years.
As more and more people realise that their pension provision may be inadequate (a retirement fund of £100,000 would buy an income of only £6,000 annually at today’s
www.opp.org.uk | JANUARY 2012
The fl ow of dreadful macro-economic news since the crash of 2008 has shaken consumers’ faith in traditional stock-market-based investments. Equities look weak and investors are increasingly considering putting their wealth into directly held alternative investments - tangible assets that provide diversifi cation away from property and the stock market and often promise high returns. But how do you defi ne an alternative?
Daniel Kiernan is the Chief Investment Analyst at Alternative Outlook as well as being a director of Intelligent Partnership.
annuity rates), investors are looking to alternatives to boost their pensions.
Other Benefi ts of Alternatives So, when it comes to selling an alternative investment to one of your clients, a key benefi ts to stress is that alternative investments are directly held assets – the investor owns something tangible with an intrinsic value that can never fall to zero, such as a piece of land, property, or gold bars. This eliminates counterparty risk; the
value of the investment cannot disappear overnight as it can do when we see major company failures or stock market crashes. Investors are also keen to avoid the
volatility of the stock market. Stock picking and timing the market are notoriously diffi cult, but many alternatives offer termed investments with fi xed annual
How alternatives help the mix
£120,000 £100,000 £80,000 £60,000 £40,000 £20,000 £0
Red line: Typical investment portfolio during crash. Blue line: Portfolio with 40% allocation of assets to alternatives.
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