JANUARY 2012 |
www.opp.org.uk
BUSINESS
returns – perhaps not as exciting as the stock market, but they do give investors more clarity and make fi nancial planning less of a guessing game.
Alternatives are also an opportunity for consumers to invest according to their personal interest: perhaps into green or ethical sectors or perhaps into a concept they really buy into. Investing in alternatives can be a lot more engaging than considering the latest managed funds.
Alternative investments in today’s economy
The ‘goldilocks scenario’ of steady growth, stable interest rates and low infl ation that we had prior to 2008
“Many alternative investments are into sectors that don’t rely heavily on economic growth”
is over and the property bull run has come to an end. Today’s economy is characterised by low growth, low interest rates, high infl ation, volatile stock markets and fears of another shock to the system.
Investing in this environment is very diffi cult for people who want to preserve their capital, save for retirement or earn a respectable income from their assets. The combination of infl ation and low interest rates is especially damaging to savers who would normally feel that ‘cash is king’
and choose to keep their wealth in cash until things improve.
Many alternative investments are investments into sectors that do not rely heavily upon economic growth, such as agriculture or renewable energy. They can offer stability and infl ation beating returns in an unstable world.
Alternatives and SIPPs SIPPs (Self Invested Personal Pensions) are a key market today as investors increasingly choose to consolidate and take control of frozen or underperforming pensions. The average SIPP size is £70 - £80,000 and there are already over 800,000 SIPPs in existence (and the number is growing at 20 - 30 percent per annum). And the important thing to remember here is that alternative investments are SIPP acceptable, giving investors the opportunity to save for the future in a tax-effi cient structure.
The market in alternatives has grown
very quickly, from an estimated 50 SIPP acceptable, directly-held alternatives in 2007 to more than 300 today. This growth has been driven by both consumer demand and the need for businesses to look for new sources of funding in the light of tighter credit conditions and less readily available bank fi nancing post 2008. In some cases, the rush to market has led to some poorly put-together projects and, unfortunately, some outright scams. For these reasons it is important to carry out thorough due diligence on
ALTERNATIVES | 41
Forestry | It is real and it is safe, and it grows in front of your eyes ... albeit slowly
any alternative investments and only work with credible partners with a deep understanding of the sector. All of which leads me on to the risks associated with alternative investments. By their very nature - as uncorrelated, less widespread investments - alternatives can have different characteristics to more commonly-held assets. Alternatives can be less liquid than cash and mainstream stocks and shares, making it hard for your client to get their money out quickly in an emergency. Also ... • it can be harder to determine the true market value of an alternative investment … so an independent valuation might be needed; • when it comes to entering an investment, there may only be limited historical data available to help assess the opportunity;
Spot gold prices in British pounds
£1,200 £1,100 £1,000 £900 £800
£700 £600
£500 £400 £300
£200 £100
2002 2004 2006 2008 Source: The World Gold Council 2010
• there can be high transaction costs, as well as on-going costs to consider; • the exit strategy from the investment can be vague or undefi ned. Your investors must be aware of and consider all of these factors before investing. The regulation of alternatives Non-regulated Investments in the UK are defi ned as direct investments into assets which are not regulated by the Financial Services Authority (FSA), such as land or property. Similar rules apply in most developed countries.
In practice this means that neither the investment itself, nor the product provider are scrutinised by the FSA and investors will not be able to complain to the Financial Ombudsman Service and will not benefi t from the protections available through the Financial Services Compensation Scheme should the worst happen. In short, investors could lose all of their investment. It’s important to note the difference between a directly held, non-regulated investment and an unregulated collective investment scheme (UCIS). With a directly-held investment there is no structure around the asset that modifi es the investor’s exposure or imposes any pooling of contributions, or income of profi ts. The investor owns a clearly defi ned piece of property and derives all of their returns from this – be it a commercial property, a piece of farmland or a gold bar. Any structure around the asset that
does modify the exposure or has a collective element is a UCIS and whilst these are not illegal, the promotion and sale of UCIS is a very highly regulated activity.
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