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Close Look: October 2022

one year ago

Alternative assets: what’s the big story?

When the going gets tough in financial markets it is sensible to have a diversified range of assets. Historically, market conditions can allow one asset class to hold up at times when another is struggling. But the days of the traditional portfolio, split between equities and bonds only, are drawing to a close. And alternative assets, which are neither equities nor bonds, have grown in popularity as a means of diversification. We run the slide rule over alternative assets, to examine what they are and what they can offer.

So what is it about alternatives as an asset class that makes them different or useful? The term is really an umbrella, covering a broad and diverse range of assets. They can be physical assets such as property, paintings, jewellery or gold. The term also covers assets such as aircraft leases, pine tree plantations, oil exploration management, big box warehouses, or infrastructure assets, such as bridges.

The aim is to find sound, well-run assets, with predictable returns, which can allow them to follow their own steady path as far as performance goes. More esoteric asset classes can be equally valuable, although require expert research to understand how they might behave under certain market conditions. As an example, absolute return funds aim to smooth returns over time, with the aim of preserving capital. And private equity can also be added to the list.

Some asset managers have even made a case for cryptocurrencies as the ultimate diversifying asset. They have been viewed as an inflation hedge that is more reliable than gold, although one that has a ‘risk-on’ quality in the way that equities do. Unfortunately, the crypto markets proved a haven for speculative investors earlier this year and have not fulfilled any such potential. Although longer term the story might yet play out.

Alternative assets or ‘alts’ have historically been the preserve of institutional investors, with US institutions thought to hold 30-50% of their assets in this class. There is a push in the US market now to broaden the appeal to sophisticated individual investors. But in 2022 fears over soaring inflation and rising interest rates have hit not only equities and bonds but alternative assets too. It seems the most dependable diversifying investment has been good old-fashioned cash, with the US dollar at the top of the pile.

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