Alternative Investments: Are They For You?Sunday, November 29, 2020
Given the increasing volatility of the markets over the past years, specifically since the economic recession of 2008, investors across the world have been looking for higher and more consistent returns on their money. This has led to the rise of alternative investments, and no, we're not talking about the once-popular, get-rich-quick Ponzi schemes of a decade ago.
What's An Alternative Investment?
An alternative investment is a legitimate financial term to describe an asset class that doesn't fall into a traditional investment category like stocks, bonds or cash. Take this to mean areas like art and antiques; precious metals; fine wine; collectibles like pop culture memorabilia, coins and stamps; private equity or venture capital; hedge funds; cryptocurrency; and real estate, to name just a few. Once thought to be the purview of high-net-worth and institutional and accredited investors because of the relatively complex nature of these instruments, alternative investments are currently having a moment with savvy individual investors seeking to reach their portfolio diversification objectives.
Because these alternatives have few to no correlations with the conventional investment categories they consequently provide return profiles that don't look like the modest returns on their conventional counterparts. They provide much higher yields than the modest traditional yields. Global alts under management are said to have reached just over US$10 trillion in 2016, with the growth forecast expected to reach US$21.1 trillion by 2025, according to PwC AWM Research Centre, Historical data from Prequin, Lipper, and Hedge Fund Research.
Why Is This So?
The fairly illiquid nature of alternatives makes them move counter to stock and bond markets, by providing an effective hedge against market volatility and inflation, as against stocks and bonds, which, as we know, are highly susceptible to the whims and fancies of the market. In other words, when stocks and bonds take a downward turn, these alternatives don't necessarily drop with them. So, alternatives are proving to be very appealing for their ability to lower volatility, enhancement of higher returns and consequently the provision of higher levels of income.
However, as with any kind of investment, it would behove the investor to do her due diligence before deciding whether alternatives are for her, as a higher degree of analysis may be required. Additionally, there is usually a high minimum investment associated with alternatives. Plus, there is also the fact that alternatives are sometimes unregulated and difficult to value. It's relatively easier to buy 1,000 shares in, say, Fontana Limited (FTNA), which was the top-performing stock on the Jamaica Stock Exchange for 2019, as against selling a painting from the 18th century. The value of the share price is set; how is the value of the painting decided on? Even with the presence of art valuators, art consumption is notoriously subjective and thus difficult to value.
The returns on alternatives may be high, but bear in mind Investment 101: Higher rewards bring higher risks. What is your degree of risk aversion? Alts can provide you higher returns because they can take advantage of size and access. It would be pretty hard to buy a bridge, but you could buy into an infrastructure fund.
Infrastructure as Part Of This Asset Class
The Jamaican and world economies for that matter will continue to see greater volatility for the foreseeable future. There's no getting around that. An area of great potential investment is infrastructure.
Our roads, highways and ports are vital areas of the economy which boost nation-building. Infrastructure powers trade and business, as well as connects workers to jobs, and creates opportunities for communities to be in touch with each other. Without an effective road network, think about how difficult it would be for market people from rural communities to make the weekly trek to Kingston to sell in Coronation Market. Better yet, think about the hardships recently faced by residents of Gordon Town in the light of the erosion of the main road after the heavy rainfall across the island.
In a country such as Jamaica, infrastructure matters, and concrete, steel, marl and even fibre-optic and broadband cable are the backbone of a vibrant economy, and therefore practical areas for investment. At National Commercial Bank, we have realised that the movement towards alternative investments is on in earnest, and we have soft-launched our Stratus Alternative Funds, a fund management platform which we will aggressively pursue in 2021.
But it's not only infrastructure that's essential. Another area that's a critical driver of our alternative investment funds platform is mezzanine investments, which are basically a hybrid of debt and equity. Additionally, there is real estate, which, for the right investor, can be a good presence in a diversified managed portfolio as a solid way to generate passive income and long-term yields. An investor might have the money to buy property of a particular size but they will also have the associated management and upkeep of the property.
A diversified portfolio is, now more than ever, vital. Alternative investments make for a wide range of assets and strategies that can sit well alongside other, more traditional, asset classes in your quest for even greater financial well-being in the coming year.
Lamar Harris is Vice-President of Wealth Management (Regional) at NCB Capital Markets. A savvy financier, with a track record of high achievements, she is a woman fuelled by determination and a quest for success, who is willing to share her expertise.
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