Wealth management companies have been increasing their holdings in alternative investments as a way of diversifying client portfolios in ever more challenging markets.
Managers explain that alternative investing – collectables such as stamps, coins, art, wine and classic cars– has grown increasingly popular over the past decade as returns from equities in particular have stalled and concerns about the stability of the world financial system have grown.
In times of economic uncertainty there is often increased demand for physical assets that have some intrinsic value, particularly those where there is only a limited supply.
The Towers Watson Global Alternatives Survey 2012, which analyses the alternative investment market, shows total assets under management among the companies it tracks at $3.87tn. The largest investment managers control more than £3tn of those assets. Much of this total is made up of real estate, private equity, hedge funds, infrastructure and commodities, but it also includes more esoteric assets.
This year’s FT survey also supports this. In its balanced portfolios, Towry increased its holdings in alternatives – which included unregulated collective investment schemes (Ucis) – from 22.9 per cent last year to 24.4 per cent today. Société Générale Private Bank also increased its holdings in alternatives, from 6 per cent last year to 13 per cent, boosted by growth in infrastructure holdings.
“Investors have turned to alternatives as the risk-on/risk-off trading environment of binary outcomes has made achieving diversification with traditional investments much harder to attain,” says George King, head of portfolio strategy at RBC Wealth Management. “This has resulted in large part from monetary and policy intervention.”
Tom Becket, chief investment officer at Psigma Investment Management, agrees. He says Psigma now has a maximum weighting in alternatives across their investment strategies to ensure it can protect client portfolios.
“Alternatives have become extremely important in modern asset allocation and provide investors with the ability to reduce risk and maximise the opportunities in global financial markets,” he says.
Coutts, the private bank, has also seen a significant increase in the number of wealthy individuals seeking to own alternative assets, such as art, as part of their portfolios. “A few years ago clients just wanted equities and bonds but now they want a wide distribution of assets and are looking to put a proportion of their wealth into alternative assets,” says Alan Higgins, chief investment officer at Coutts.
Another growth area for wealth management companies has been infrastructure. This is a sector where the success or failure of a fund relies heavily on government spending, but the sector is largely seen to be stable and have a lower risk than traditional equities.
Chris Hills, chief investment officer at Investec Wealth & Investment, says “Infrastructure funds are providing a welcome source of income for many investors and we expect the sector to continue to perform solidly over 2013.”
Investec has increased its clients’ overall exposure to infrastructure funds by over £40m over the past 12 months and is one of the largest shareholders in four of the largest publicly quoted infrastructure vehicles – GCP Infrastructure, International Public Partnerships, John Laing Infrastructure and HICL Infrastructure.
Another popular asset class is property. It is possible to invest in open-ended funds that invest either in direct property or in company shares, while real estate investment trusts (Reits) also allow investment into direct or indirect holdings.
But demand for property is changing with some wealth managers reporting a rise in client’s wanting to own property directly. Mohammad Syed, head of strategic solutions at Coutts, says: “Over the past year one growth area has been in direct investment opportunities. For those clients interested in clubbing together and buying a property we will often source that property for them and then act as a bridge between the client and the seller of the asset.”
Other wealth managers like hedge funds as a diversifier for client portfolios. Iain Tait, partner at private investment office London & Capital, says: “Hedge funds and private equity can be a very useful tool when diversifying a portfolio. Typically, these funds are used for downside protection, rather than to enhance returns, which further de-correlates them from the wider markets.”
But not everyone is keen on alternative assets. Some warn would-be investors to look very carefully at where the returns are coming from – and what they’re hoping to gain – before committing to any product that invests in non-mainstream assets.
“Whilst the lure of alternative investments can be strong, they are very often promoted with the promise of high returns we find that in times of difficulties real issues arise for investors,” warns Lee Robertson, at financial advice group Investment Quorum.
“These can include ‘gating’ or the locking in of invested capital, illiquidity, dramatically falling underlying capital values and the issues raised by lots of investors rushing for the doors when they anticipate troubles within the fund or investment class.”
Get alerts on Private wealth when a new story is published