Alternative investments offer “off the beaten track” opportunities
ALTERNATIVE investing is a trend that has strengthened in recent years. It is about investing in assets that are not part of the traditional asset classes of listed stocks, bonds, listed assets and cash.
You may be considering ways to incorporate alternative investments into your portfolio. However, apart from the advantages, these investments have their disadvantages, which you should be aware of.
What are the alternative investments?
David Moore, head of alternative investments at Alexander Forbes Investments, explains that there are two broad categories:
- Private markets. These encompass entities that are not publicly traded and whose value is not calculated daily, and they include private credit, private equity, venture capital investments, and real assets. Real assets include infrastructure and properties.
- Hedge funds. These are funds that use derivatives to smooth market volatility in a common investment portfolio.
Moore says these are the larger, institutional grade types of investment, but there is also a âcollectiblesâ category, which includes art, wine, and vintage cars.
Why the shift towards alternatives?
The main drivers of the alternative investment trend are the need for greater diversification, access to opportunities not available in the traditional investment space, and a growing desire to invest in projects that benefit the economy and society.
- Diversification. Moore says the change is largely due to traditional investments offering below average returns in recent years, particularly in South Africa, and you need to “invest more widely to give yourself inflation-linked returns and, ultimately, protecting your capital and preserving wealth for the long haul â.
In an article titled âObtaining Alternative Opportunities to Withstand Shocks and Changes in Your Investments,â Riccardo Fontanella, Technical Marketing Manager at Alexander Forbes Investments, says investors are increasingly turning to alternative investments to absorb the losses. traditional market shocks. âWe live in a time when financial storms could become more fierce – heightened levels of uncertainty and fragile economies can lead to rapid changes in markets and greater and more frequent volatility than we have experienced over the past decade. the last decade. Investors will need help, âhe said.
Young companies, both here and abroad, tend to stay private longer. In recent years, the number of companies listed on the JSE has declined as new listings have declined significantly. Moore says the possible reasons are the costs a company incurs to become a listed entity and the burden of regulatory compliance and administration. He says that while listed companies have diverse and largely passive ownership, a private company is owned by a concentrated group of individuals who have a stronger motivation to make the business prosper and grow.
- Increased opportunities. âWith private markets, investors have access to investments that are not available on public markets. For example, South African stock exchanges have limited exposure to companies in the tech or clean energy sector. In the rest of the African continent, private markets are more important than public markets. Therefore, to take advantage of investing in countries where there is little or no public procurement – for example, Ethiopia – you can access opportunities through private markets, âsaid Moore.
- Make an impact. Investing to have a positive impact on society, taking into account environmental, social and governance (ESG) factors, is a strong trend in traditional investing. However, the alternative investment landscape offers unique opportunities in this regard. In an article âImpact Investing: a catalyst for SA’s growthâ, Zeyn Ismail, investment manager in Stanlib’s credit alternatives division, said: âWhile investing for impact is not a new thing. concept or new investment strategy, the benefits and expected results are now more critical than ever for the current economic situation in South Africa. The boom in impact investing comes in response to the more traditional one-dimensional search for the highest return. Instead, the impact investor considers the tangible impact of investments on the environment and society while seeking financial results.
Impact investing typically involves private sector companies (often small businesses) partnering with government in social and infrastructure development. Ismail says that areas that have the potential to act as catalysts for change in South Africa include health care; education; financial services; affordable housing; and a cleaner and more stable energy supply.
- Lack of regulation. Private equity funds are not regulated by current financial sector laws, although the Financial Institutions Conduct Bill, released for comment in 2018, proposes to regulate private equity funds as ” alternative investment funds â. The Law on the Control of Collective Investment Schemes, which regulates mutual funds and exchange-traded funds, severely restricts the participation of private equity and derivatives in these instruments. Since 2015, hedge funds in South Africa come under this law.
- Increased investment risk. Private companies aren’t as tightly regulated as state-owned companies, although Moore points out that, given the monumental failures of JSE-listed companies in recent years, the risks may not be as great as many think. Young start-ups naturally have a higher investment risk than larger established companies, but they also offer potentially higher growth.
Moore points out that not all alternative investments are high risk. Private credit can behave much like corporate bonds, and infrastructure investments are generally low risk.
- Lack of liquidity. Alternative investments lack the liquidity of traditional assets, which makes it difficult to exit from a short-term investment. Moore says, âBecause it is not as easy to freely buy and sell these types of investments, they require commitment over longer investment periods. In return for the length of their engagement, investors are generally rewarded with the prospect of a higher return, or liquidity premium, on their investment.
Listen to a podcast with Martin Hesse and David Moore here.