Alternative Investments: Portfolio Vigor For the Future

Thursday, June 26th, 2014 and is filed under AI Insight News

Alternative investments will continue to surge in 2014 and beyond. That’s the bullish view of many market observers. According to a survey released by Morgan Stanley, 77 percent of investors with at least $1 million in assets own real estate. And while direct ownership was the primary choice among these investors, 23 percent said they expect to invest in real estate investment trusts, the second most popular choice. These alternative investment choices were followed by collectibles, private equity, and precious metals.

Wealthy private investors aren’t the only ones with their eye on alternatives. Institutional investors are zeroing in on alternatives as well. These investors are seeking performance in an environment fraught with uncertainty, sluggish growth, low yields, and volatility. According to a survey of 100 institutional investors by the investment firm BlackRock, Inc., 49 percent planned to move into real estate, while 40 percent expressed an interest in real assets. Fully one-third said they would reduce their cash reserves in 2014.

Alternative classes encompass everything from “real” assets like commodities, farmland, and timber, to partnership interests in privately held businesses, derivatives contracts, and sophisticated debt structures. They can also include partnerships involving publicly traded securities that hedge by selling short, and real estate investment trusts (REITs), publicly traded or private.

The current interest in alternatives is following a vigorous pace set in 2013. Global alternative investment assets topped $6 trillion last year, expanding by some $600 billion. Globally, there are more than 13,000 funds investing in equity, hedge funds, real estate, and infrastructure. That’s a strong vote of confidence. And a shift.

Until the latter part of 2007, alternative investment classes—or anything investable that is not a stock, a bond, or cash—enjoyed uninterrupted growth. Then came the financial meltdown. Between 2007 and 2009, financial market disruptions, operational shortcomings, and poor performance, combined to bleed investor confidence from the sector.

That has changed. Interest in alternatives has gradually increased. Why? As the credit crisis receded, managers refined their alternative investment models, strategies, and focus. In addition, the upheaval of 2008 forced many investors to rethink their long held strategies. The traditional 60/40 stocks-to-bonds portfolio model appeared to be broken and ill-suited to the current landscape. Investors began focusing on alternatives as a way to diversify and potentially generate earnings during future market disruptions and corrections.

Then there’s the complexion of the current investment environment. Many investors are growing worried that the prolonged rally in U.S. stocks is growing threadbare. Others fear the Fed’s measured exit from “quantitative easing”—perhaps the key driver in the stock market rally—won’t be as disruption-free as some policymakers lead us to believe.

When compared to the traditional investment strategies, alternative investments are much less prone to volatile upheavals, and in theory ensure steady growth and earnings. Yet nominal growth, virtually across the board and around the world, remains sluggish. So where are the opportunities?

Strategies built around long-short, infrastructure, oil and gas, and real estate are ripe for exploration. Some analysts are bullish on private equity strategies in oil and gas pipelines and other energy infrastructure. These investments are true diversifiers and can offer attractive yields in a low-rate environment. 

In the current landscape of paltry bond yields and diminishing opportunities in fixed income, alternative investments have emerged as a go-to diversification tool. They can dampen volatility and heighten resilience within an investment portfolio by delivering non-correlated performance relative to stocks, bonds, and cash investments. And that can mean a little bit of certainty, in an uncertain investment world.

If your independent broker dealer is looking to become more involved in providing alternative investment options to its investor base, contact AI Insight to learn how we can help. We provide not only regulatory-compliant advisor training capabilities, but access to hard-to-find alternative investment product information.