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Published 17 July 2012 07:20, Updated 18 July 2012 05:26
Grow your wealth ... More than $US3 trillion is held in alternative investments globally by the top 100 managers Photo: Getty Images
Australian investors usually focus on three asset classes when investing their money: property, cash and shares.
Both property and shares have disappointed over the past few years, leading investors to seek safety in cash. Unlike many developed economies, interest rates have stayed up in Australia, providing investors with a safe haven.
According to research firm Multiport, 38 per cent of self-managed super fund assets are in cash or fixed interest, 35 per cent is Australian shares, 18 per cent is in property and 8 per cent is in international shares.
What other options are there? The bucket of asset types generally known as “alternative investments” is likely to grow in popularity. One reason is the timing of returns. Martin Goss, senior investment consultant for Towers Watson, says the attraction of alternative investments is that it allows investors to have assets that “come good in different time periods”.
He says that equity markets tend to be sold off at the same time. The perception of the value of individual companies is subordinate to investors’ perception of the overall market.
“[With alternatives] you smooth the path of return that you get,” he says.
“In the global financial crisis, basically everybody wanted to get out of every risky asset they had, which created a lack of diversification when panic set in. That is where the argument for not over-relying on equities comes in.”
The GFC and its aftermath has created a desire to look for better investment options. “While the equity market continues to provide high levels of volatility and poor returns, then anything that does not provide high volatility and poor returns is attractive,” says Chris Gosselin, chief executive of Australian Fund Monitors.
Alternatives investments are already popular with institutions. For example, at the beginning of the 2011-12 financial year,the Future Fund had 18.4 per cent of its funds in alternative investments and 4 per cent in private equity. The Future Fund annual report describes its investment in alternatives as “exposure to assets not covered in equities, private equity, debt and tangible assets”.
Mark Sowerby, managing director of Blue Sky Alternative Investments, says one of the most famous investment funds, the Harvard Endowment Fund, reduced its allocation into domestic equities from 38 per cent in 1995 down to its current level of 12 per cent. Over the same period, alternative investments, otherwise known as absolute return investments, increased from nothing to the current level of 16 per cent.
The assets managed by the top 100 alternative investment managers globally exceed $US3 trillion, according to research by Towers Watson. Real estate managers have the largest share of assets (35 per cent) followed by private equity managers (22 per cent), hedge funds (21 per cent), private equity fund of funds (9 per cent), fund of hedge funds (6 per cent), infrastructure (4 per cent) and commodities (3 per cent).
Twenty Australian managers feature in the Towers Watson survey. They have combined assets of funds under management of $254 billion. The top 10 managers in the list are: Macquarie Group, AMP Capital Investors, Goodman, QIC, Dexus Property Group, Industry Funds Management, Platinum Asset Management, Charter Hall, Lend Lease, and Hastings Funds Management.
Retail investors are yet to take to alternatives, however. Gosselin says there is a lack of education and reliable information. “Wholesale investors are more likely to be able to distinguish the rights and wrongs of an alternative investment,” he says. “The retail investor is at the mercy of advertising and the research isn’t really that independent. Fund managers have to get research reports not because they want to but because they have to.” He says reports tend to lack accuracy and integrity. “It is called a conflict of interest, generally.”
Sowerby says retail investors are likely to become more interested in alternatives as they move away from their traditional focus on property and equities. “A lot of money is in cash right now, particularly self-managed super funds. But offshore, there is a much greater allocation into the bucket called alternatives.”
Sowerby says the local industry super funds put about 20 to 30 per cent into alternatives, whereas individual investors have only about 1-5 per cent in alternatives. “There is a huge disparity,” he says. “It is not happening [at the retail] end of the market. Hedge funds, for instance, have outperformed equities through the course of the financial crisis. The stockmarket has been down by 50 per cent. If you use the Future Fund as a proxy for [a strategy using alternatives] in the last five years, then it has returned 5.5 per cent compound during the global financial crisis. One of the reasons for that is that they had such a large allocation to alternatives.”
Sowerby says that private wealth advisers and financial planners tend not to put their clients into alternative investments. But he believes this is about to change. “Most planners use platforms and there are administrative platforms that preclude the use of alternatives ... Advisers haven’t had access to the better investment options in this asset class, and they were incentivised to promote products that paid high commissions, or they didn’t understand what they were investing in.”
After developing a macro strategy, there is considerable potential diversification available in alternatives.
For instance, the Future Fund at June 30, 2011 had an allocation in many sophisticated plays: 26 per cent in multi-strategy/relative value investments (hedge funds that use a different strategies or look for arbitrages), 31 per cent in macro-directional alternatives (a punt on which way markets will move), 28 per cent in distressed assets. Only 9 per cent was fundamental long/short investment, investments based on the fundamental value of the assets followed by either investments that assume the price will rise (going long) or the price will fall (going short). Seven per cent was in commodity-related plays.
A danger with alternative investments is that they can become too complex. A report by MLC Investment comments that “too many alternative investments may not be alternative enough”.
For alternative investments to work, they need to provide something genuinely different either in terms of strategy or time period. Having too many will tend to mean that the returns converge with those of the overall markets, at which point it becomes more like generic benchmarking investing.
When using alternative investments, investors must decide if they are using them to get better than the average market returns (alpha) or the general market returns (beta).