In the quest for maximising returns while managing risk, investors are increasingly diversifying their portfolios beyond traditional assets like shares and bonds. Alternative assets offer distinct characteristics and benefits that can enhance a balanced investment strategy. In this article, I explore the types of alternative assets we use, and some benefits of holding them in an investment portfolio.
Characteristics of alternative assets
■ Low correlation: One of the most appealing features of alternative assets is their low correlation to traditional asset classes. This means that they often move independently of shares and bonds, which can help reduce overall portfolio volatility.
■ Illiquidity: Some alternative investments can be less liquid than other listed investments. This means they can take longer to sell – delaying when investors can get their money back. While this poses some risk, it can also lead to higher returns as investors are compensated for taking on more illiquid positions.
■ Diversification potential: Including alternative assets in a portfolio can help spread your investment more broadly. As these assets may respond differently to market conditions, alternative investments can reduce risk and balance the overall portfolio performance.
■ Complexity: Alternative assets often require a deeper understanding and more extensive research than traditional assets. Investors must consider factors such as market trends, valuation techniques, and specific risks associated with these investments.
Types of alternative assets we incorporate into our managed portfolios
Commodities: Physical goods like gold, silver, oil, and agricultural products such as carbon credits fall under this category. Commodities are often seen as way for investors to protect themselves against declining purchasing power when prices are rising. This is because commodity prices generally rise with inflation. This helps to spread risk in a portfolio. Buying commodities doesn’t have to involve freeing up space in the garage for gold storage. They can be bought through funds traded on share markets, so they are more easily tradeable.
■ Listed private equity: Private equity involves buying unlisted private companies. This can generate high returns, although it typically requires a longer investment timeframe and more significant sums of money to get started. However, regular investors can gain exposure to this by buying investment products that are listed on share markets.
■ Listed hedge funds: Hedge funds are pooled investment funds that employ various strategies to seek high returns. While hedge funds can have high minimum investment requirements or other barriers to entry, they can be accessed through share markets in a similar way to listed private equity.
Benefits of holding alternative assets
■ Enhanced returns: Many alternative assets offer the potential for higher returns compared to traditional investments. For example, private equity investments have historically outperformed public equity markets over the long term.
■ Risk management: Incorporating alternative assets can help manage risk. Their unique characteristics can provide a buffer during market downturns, preserving capital and reducing portfolio volatility.
■ Inflation hedge: Commodities often serve as effective hedges against inflation. As prices rise, these assets may also increase in value, protecting the purchasing power of investors.
■ Access to new opportunities: Alternative investments can open doors to unique opportunities that are not available in public markets, such as startup investments.
■ Improved portfolio resilience: The inclusion of alternative assets can enhance a portfolio’s resilience against market shocks. By spreading investments across different asset classes, investors may find greater stability during economic uncertainty.
Conclusion
Incorporating alternative assets into a balanced investment portfolio can provide numerous benefits, including enhanced returns, improved diversification, and better risk management. While these assets can introduce complexities and require thorough research, they present valuable opportunities for investors seeking to build robust and resilient portfolios. When investing in alternative assets, investors and managers should make decisions with a view of the entire portfolio in mind. It’s important to carefully consider the appropriate levels to hold such assets.
For example, in the Jarden Wealth standard mix of investments, alternative assets consist of no more than 5% of the portfolio. As market dynamics continue to evolve, the relevance of alternative investments is likely to grow, making them an essential consideration for savvy investors.
About the Author: Tobias Taylor is Director, Wealth Management Adviser at Jarden.
The information and commentary in this article are provided for general information purposes only. It reflects views and research available at the time of publication, using external sources, systems and other data and information we believe to be accurate, complete and reliable at the time of preparation. We make no representation or warranty as to the accuracy, correctness and completeness of that information, and will not be liable or responsible for any error or omission. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Securities Limited is an NZX Firm. A financial advice provider disclosure statement is available free of charge at https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement
