SMSFundamentals | Jun 20 2012
SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.
For an introduction and story archive please visit FNArena's SMSFundamentals website.
By Greg Peel
Investors across the globe, including in Australia, are understandably fed up with stocks as an investment. The GFC plunge was one thing but the Europe-driven rock'n'roll ride ever since has only added to frustration and despair. Investment in fixed interest has proven far more lucrative recently but with bond yields in safe haven economies now at record lows, further upside is limited. Cash has proven a very good investment in Australia, but with the RBA now cutting the attractive yields of a year ago are but a memory.
How then should an investor allocate between the traditional asset classes of stocks, bonds and cash? The answer it seems, on a global scale, has been to allocate away from all three. So-called alternative investments have gained substantially in popularity since 2010, when Russell Investments last commissioned its biennial Global Survey on Alternative Investing. Russell surveys institutional investors, not individual investors, but the results reflect investment demand from individuals via institutions.
So what are “alternative investments”.
Well firstly, while Real Estate Investment Trusts (REIT) trade alongside stocks on the ASX and other exchanges, they are considered as “property” and thus alternative. Direct investment in commodities (as opposed to mining stocks) is also alternative, as is investment in private real estate and in private and public infrastructure. Another alternative is to “invest” in hedge funds, albeit hedge funds may in turn invest in traditional asset classes as well as less traditional asset classes. Private equity is also an alternative, although this is big in the US and less so in Europe but minimal in Australia.
Just because one has invested in alternatives at a time traditionals are not offering much does not thus assume alternative investment has been a winner. But globally, 70% of survey respondents suggest alternatives are meeting their expectations as portfolio constituents and this number jumps up to 85% for Asia Pacific investors (ex Japan), which includes Australia. On average, respondents are holding 22% of their portfolios as alternatives.
No surprise that 90% of respondents cite diversification as a reason to invest alternatively, with volatility management and low correlation to traditional investments also popular (64%). Actual return potential was cited by only 45%, reinforcing the notion we are currently in a climate in which making money is secondary to the primary issue of simply keeping it.
Despite the increase in popularity of alternatives since the last survey, respondents indicate the shift is not over yet, with many implying they wish to allocate further portfolio weighting to alternatives and away from traditionals.
If the survey is an accurate predictor, hedge funds and private real estate will see the greatest portion (32%) of that reallocation while traditional cash is considered by 45% to be too heavy a weight in current portfolios. Of hedge funds investors, 49% utilise a fund of funds structure but even this longstanding form of diversification is losing favour, with interest shifting towards direct individual hedge fund investment. Some 63% of respondents are obtaining customised hedge fund solutions to “complement existing exposures, pursue niche opportunities and access strategy-specific expertise”.
There is understandably a lot hedge funds and investment variations in the US, but Australia is not without its own growing band of non-traditional investors.
When it comes to property investment, 51% of global respondents prefer REITs compared to only 23% in direct investment. Not that your own home is not considered as an investment asset, even if it is. Direct commodity invest is considered a bit out there across the globe but not in Australia, where it is mainstream.
Private and public infrastructure investment represents only a minimal proportion of alternative investment at this stage, although Australians exceed the global average. This may come of a bit of a surprise given a few listed disasters of late (Brisbane toll road comes to mind) as well as unlisted (any PPP tunnel in Sydney). However infrastructure investment is very much at the forefront of Australian political intention, which should provide some less scandalous investment opportunities ahead.
It is not surprising that across the globe, trustees are demanding more education on alternative investments and are favouring those investments which provide such education.
For Australian investors considering a move into alternative investments there is, unfortunately, one downside. Now that the government has cleaned up the rip-off factory they once called institutional superannuation management, and offered up MySuper as the no frills and low cost benchmark for super investment, fees on investments outside the now more highly regulated traditional sphere appear somewhat steep by comparison.
But then you can't get something for nothing, including sleep.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
