ASHBURTON INVESTMENTS: Expert Opinions: Edition March / May 2020


Benefits of alternative investments

They’re numerous as Rudigor Kleyn, MD: corporate and institutional at Ashburton Investments, points out.

More SA investors are including alternative assets in their portfolios as they increasingly understand the benefits offered.

This echoes a global trend. In little more than a decade, global alternative assets under management have grown from $2 trillion in 2008 to about $5,5 trillion in 2019. They’re expected to exceed $8 trillion in 2023.

Alternative assets refer to those not traded on a public exchange. These include private equity, private debt, real estate and infrastructure. Also classified as alternatives are art, antiques and classic cars.

In the past, alternative investments were considered too difficult to access, high-risk or complex for many investors. But now they’re accepted as an attractive means to diversify portfolios, often achieving better inflation-beating returns than traditional listed markets.

Alternative investments cover such a broad range of investments it is impossible to classify the whole category as one particular risk. Some, such as a venture capital that provides seed money to fledgling businesses on starting up, are high risk. Infrastructure, on the other hand, is less volatile and lower risk with returns uncorrelated to business cycles.

The main benefit of including alternative asset classes in an investment portfolio is to have sufficient diversification to reduce risk and enhance returns. They may also act as an inflation hedge, provide reliable income streams, generate high absolute returns, contribute towards sustainable investing goals and provide access to emerging markets where public markets are thin.

How to grow portfolios

Investors should consider a welldiversified portfolio that can deliver a steady, above-inflation return throughout market cycles. This might include public market allocations to fixed income, public equities and cash complemented by some exposure to inflation-beating benefits offered by alternative assets.

As with any investment, the returns for private assets are not guaranteed. But they can potentially be higher than traditional investments, outstripping CPI to provide a good inflation hedge.

As it is more difficult to disinvest from alternative assets, investors are generally compensated with higher returns known as the ‘liquidity premium’. There are different types of alternatives.

Infrastructure investments refer to those in vital projects such as new roads, power supplies, airports, bridges, tunnels, ports, water and telecommunications. Across the world there is a growing need for more infrastructure, providing strong long-term demand. It is estimated that globally at least $3,5 trillion to $4 trillion of annual investment is required through 2035 to keep pace with economic growth.

In the past, infrastructure tended to be funded and managed by governments. Given constrained government finances,

there has been a growing role for private funding.

Private equity refers to shareholder capital invested in private companies as opposed to publicly listed companies. Private equity tends to involve more than simply the transfer of capital. Investors become actively involved in management to build the businesses into more sustainable and better-run entities. This ensures they make good returns while the businesses are left stronger and more resilient. Private equity investors generally  invest for the long term of around 10 years.

Private debt funds lend money to companies, as an alternative to bank lending. Investors in these funds can access better yields than government bonds offer in a fairly low interest-rate environment.

In summary

Alternatives offer distinct advantages such as potentially higher returns (which cannot be guaranteed) and greater portfolio diversification. Investors should understand the benefits and unique risks of each alternative-asset type.