Business Irish

Monday 18 November 2019

Looking for a higher return? Some alternative investments placed under the spotlight

(stock picture)
(stock picture)

Rory Gillen, founder of GillenMarkets

Conventional investments like stocks, bonds and cash are the mainstay of most investment portfolios, structured according to the anticipated investment term and desired levels of risk and return.

Historically, equities, or stocks, have trumped all else in terms of returns.  And for good reason, most financial advisors would say. 

Lower returns are expected, going forward, however.  Balanced portfolios will likely produce returns below 3pc.  But the general advice would be to have no fear around equities, particularly if you can invest regularly and/or take a minimum five year view.

Investments that mitigate the principal economic risks of recession, inflation and deflation carry the obvious downside that there is little or no return.  Non-risk assets like bank deposits and government bonds currently provide no income.

So, what is the alternative?

Alternative investments must be placed under the spotlight to determine whether or not they measure up, particularly to the generally reliable longer-term returns that a balanced stock market portfolio will offer.

The more typical alternative investments include private equity, hedge funds, managed futures, property, and commodities, like precious metals or oil.   But their are other options, from Irish commercial property, to value investing in Japan, to gold.

There are pros and cons to each.  Gold, for example, covers risks that other assets simply cannot, in terms of protection of capital. If Governments and banking systems become insolvent, gold retains its intrinsic value, where local currencies and domestic assets may not. 

Government-sponsored renewable wind energy assets that offer high income and quasi-Government guarantees also come recommended.

Approach with Caution!

Floating rate notes and bonds are in favour too, where the interest coupon adjusts upwards, if and when interest rates rise.   However, as most private investors cannot assess the credit risk in companies, the advice here is to invest via fund structures. 

Similarly, peer-to-peer lending platforms should be approached with caution, unless the investor is sure that adequate credit quality analysis is being performed. 

So, will a spread of conventional and alternative investments help mitigate risk when investing and drive higher return?

Well, hedge funds have not delivered attractive inflation-adjusted returns in the last decade.  In fact, investing in hedge funds has added no value, over owning traditional assets, and has been a frustrating and costly experience for investors.

Fans of cryptocurrencies say they represent a new medium of exchange and, like gold, a new way to settle trades outside of the banking system.   But that does not mean they represent a store of value and, without intrinsic value, or some alternative use value, you would have to believe their prices will go to zero, or close to it, in time.

Certain alternative investments do merit real consideration, ahead of non-risk assets, and our conference panel will lead an interesting discussion.

Diversify risk and return drivers

There are, of course, risks with alternative investments too, but these are different to equity risk, and it is important that investors diversify both their risks and return drivers.

The message, as always; if you need to take a cautious approach, accept the lower return.

But, worth thinking about is whether you really need to take this lower risk, particularly if you are a regular investor or someone with a long-term investment horizon?  

This is a major issue for many pension accounts in Ireland, as the natural inclination is for savers to take the middle ground.  But this may not serve certain people too well in retirement

Rory Gillen is the founder of GillenMarkets and has nearly 30 years’ experience in the Irish financial services industry. The 2018 GillenMarkets Annual Investment Conference takes place on Wednesday evening, 10th October, in the Shelbourne Hotel in Dublin, from 5pm.

Online Editors

Also in Business