Alternative assets worthy of note
IN TIMES of negative returns, should you look at alternatives?
IN TIMES of negative returns, should you look at alternatives?Financial markets in turmoil, skyrocketing petrol prices, lower super balances - it's enough to drive you to drink!For investors looking to add some diversity to their portfolios and buffer them against volatility, alternative assets are an increasingly popular option. Alternative investments can be pretty much anything that's not a mainstream asset (that is, international and Australian shares, property, cash and fixed interest). They can include private equity, hedge funds, infrastructure, and emerging markets such as Brazil, Russia, India and China, as well as art, commodities (principally gold), antiques and wine.In these unstable times, investors are looking at alternative assets with growing interest. Alternatives, the theory goes, can help reduce risk, while maintaining the expected long-term level of return or they can be used to boost returns with a similar overall level of risk. They do so by offering an additional source of diversification within a portfolio that helps smooth out any short-term volatility.In the main, investing in alternative assets has been something the professionals do. For interested individuals, you may wish to check if there is an investment option in your super fund that has an exposure to alternatives.For self-managed super funds looking at alternative assets, care needs to be exercised because of the existence of the sole purpose test. It requires all super funds to be maintained for the sole purpose of providing old age and retirement benefits to fund members.In a practical sense, it means you can't hang the work of art you've invested in via your super fund on your wall (but you may be able to rent the artwork out on arm's-length terms) and you can't drink the vintage wine you've got cellared either!So how alternative should you be? In the past, the generally accepted wisdom has suggested that alternative assets should make up 5-10% of an investment portfolio. This has recently changed, with some portfolios containing between 20% and 40%.A new study in the US, for instance, has found that the top US institutional investors are expected to allocate more than 22% of their overall portfolios to alternatives by 2010.As always, when taking a path less travelled, it's important to do so with a pretty good - and up-to-date - guidebook. In deciding if your portfolio could benefit from the inclusion of more alternative assets, you should talk to your financial adviser about the potential pitfalls.Alternatives can be expensive, so check the fees (and there may be several layers of these, such as base, performance and underlying investment manager fees). They can lack transparency and liquidity, may have complex legal/tax structures, and can be difficult to research and compare with other funds because of their niche nature and relatively limited performance history.Finally, remember that super is a long-term investment. While you should review your investment strategy, you don't necessarily need to change it. Keep in mind that every market downturn in history has historically been followed by an upswing. Speak to a licensed, or appropriately authorised, financial adviser to find out all the options available to you.Raegan Durch is a senior financial adviser and CFP with Mercer Wealth Solutions.
Share this article and show your support