Alternative Investments & Specialist Sectors

Posted on June 7, 2020

Since the equity crash of 2007/8 many investors have been considering alternative assets as a means to protect and growth their investments. Credit/debt, infrastructure and property have all become an increasingly common forms of investment.

This is no doubt because of the above average returns many offer; analysis of performance across the market shows that specialist sectors are regularly well-represented among investment companies returning over 5%.

Credit as a Sensible Investment?

Central bank reaction to the financial crisis from 2009 in the UK, Europe and the US has meant very low interest rates and large financial asset purchase programmes (of private sector financial and other products, and government bonds) via quantitative easing.

The hoped for effect of these massive cash injections into the economy has been to create an environment that is generally more confident and credit-friendly.

Being certain the credit is ultimately secured on something that is not too liquid (not repeating mistakes of the past), carefully chosen investment in credit can offer a good yield.

Infrastructure as an Asset Class

In recent years investors looking for longer term and more reliable income have also increasingly been considering infrastructure as an investment class. The economy, and society as a whole, cannot function without infrastructure. Everyone is involved as either owner or consumer of these assets, or both, from household utility bills that help fund the energy sector, or the different forms of tax that funds education, health and social care, or major transport engineering projects.

The increased involvement of the private sector in many areas once considered public domain means that there is the opportunity of profit (as, like it or not, most public services are now run to generate income) but also an element of safety. The physical assets involved are too important to society as a whole to be allowed to fail, so there will be a level of government support via the public purse.

Listed & Unlisted Infrastructure

Infrastructure investment has historically been centred on assets subject to Public / Private Partnerships or the Private Finance Initiative: predominantly ‘unlisted infrastructure’ (i.e. not publicly traded). More recently you will also find renewables investment funds and infrastructure debt funds under the ‘infrastructure’ tag, but these are ‘listed’ (and therefore traded) – not the same thing.

Opinion among financial commentators is polarised on the merits of listed vs unlisted, but one thing is clear: infrastructure has frequently delivered consistent, even predictable, performance, without much price fluctuation. The fact that it is becoming more widely known has of late been a contributory factor to its success. Do bear in mind that the yield and risk can vary widely across the sector however, and that ‘good things’ can stop being so once everyone is on board.

Property in the Health & Social Care Sectors

The UK population is ageing. A recent study by Newcastle University and the LSE projected that, within the next twenty years, the number people needing constant care would rise by over 30% over age 65 and nearly 50% over age 85. The much-criticised ‘dementia tax’ was one attempt to offset the projected cost of the financial problems this will cause.

Whatever your views on policy in this area, one thing is certain: the UK’s care home stock needs to be enlarged substantially. With leases of up to thirty years, there is the possibility of inflation-linked income in the form of quarterly dividends from this type of investment.

Commercial Property

Direct commercial property funds (also referred to as ‘bricks and mortar’ funds, commonly for supermarkets, offices and warehouses) can offer access to otherwise unobtainable investments and, again, the ultimate asset is not a liquid one.

The UK’s standard benchmark for property investments is the IPD index (which this year is tracking nearly 3,000 different investments of just under £49 billion, perhaps 10% of the total market) and this has recovered from 2013 onwards, surpassing pre-2007 levels.

Diversification

One of the oft-repeated mantras of sound investment is the importance of a sufficiently diverse portfolio. So, aside from the above-average returns that many alternative investments have delivered to date, another reason to consider them is the new asset classes they can introduce to your overall holdings.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

No guarantee can be given that the information provided is accurate in the present or the future. It is not intended to constitute either a statement of applicable law or financial advice, and responsibility cannot be accepted for any subsequent loss following activity or inactivity by any individual or organisation. Indeed, such information should NOT be acted upon without first receiving appropriate and specific professional advice.