Alternative investments are assets that do not fall into one of the traditional asset classes that Australian investors are most familiar with, like equities, fixed income and cash. They include a broad range of assets such as private equity, venture capital, hedge funds, infrastructure, real estate and agriculture and can be growth or income focussed.

Why would you consider adding alternatives to your portfolio?

A great benefit of alternatives is that they are not bought and sold on public markets such as stock exchanges.  The investments are often available in less efficient markets that provide greater opportunity for skilled managers to enhance returns, because there are fewer managers with their attention focussed on the same investments.

In addition, alternative investments have returns that tend not to move in step with traditional asset classes.  Ideally, when traditional assets fall in value, alternative assets will hold their value or even rise.  The benefit of holding an allocation to alternative investments was demonstrated in the Global Financial Crisis, when some alternatives maintained their value while all traditional assets, other than cash, fell.

Therefore, a primary benefit to including alternatives in your investment portfolios is to enhance returns and provide diversification.

 

Alternatives in institutional investment portfolios

The largest investors are institutions like government investment bodies and large pension funds (the overseas equivalent of Australian superannuation funds).  Alternative investments have become a critical part of their investment landscape with the top 12 sovereign wealth funds holding alternative asset allocations between 15% and 39%.

This trend is replicated in Australia. The Future Fund had a 39.3% allocation to private equity, property, infrastructure, timberland and alternative assets as at 31 March 2017.  Industry super fund alternative asset allocations averaged 25% as at 30 June 2015.

These institutional holdings are in stark contrast to individual investors, whose average alternative asset allocation has been estimated at 5%.  The lower allocation for individual investors can be explained by the difficulty of accessing investments with smaller amounts of money, a lower level of investment knowledge and the greater need for individuals to access their money in time of need.  However, the alternatives sector is increasingly offering more liquid structures to accommodate the needs of individual investors, and the use of alternatives in individual portfolios continues to increase.

 

The risks of alternative investments

Alternative investments tend to be structured with a fixed lifespan and limited access to capital. This is because the underlying assets tend to be illiquid (not easily converted to cash). Liquidity poses a major risk where investors can’t easily sell an asset and realise their investment. As a result, careful portfolio construction, alongside your Perks Wealth Management advisor, is important to ensure that you have sufficient access to liquid funds from the other assets in your portfolio.

The variety of investments available in the ‘Alternative’ asset class is vast. Many are highly complex and require thorough analysis to separate the genuine opportunities from the expensive mistakes. At Perks, we undertake detailed research of each investment and together with a thorough understanding of how each investment fits within your broader portfolio, we are able to show you how they will contribute to your overall objectives and ensure you achieve your desired outcomes.

If you have any questions about Alternatives, or would like to discuss the option of adding them to your investment portfolio, please don’t hesitate to contact Peta Nunn on (08) 8273 9300 or pnunn@perks.com.au

 

Any financial product advice is provided by Perks Wealth Management Pty Ltd AFSL No. 236551 (“PWM”). You can contact PWM on 08 8273 9300 or by visiting its website at www.perks.com.au. The information provided is general in nature and is not personal financial product advice. The information provided has been prepared without taking into account your objectives, financial situation or needs and because of this you should, before acting on it, consider the appropriateness of it having regard to your objectives, financial situation and needs. You should carefully read and consider any product disclosure statement that is relevant to any financial product that has been discussed before making any decision about whether to acquire the financial product