Analyst Insights
Much has been made of how traditional asset classes of equities and fixed income securities have performed in 2020. From the over 30% decline in March, when the World Health Organization declared the COVID-19 a global health pandemic, traditional asset classes went into a tizzy. Today, much of that decline has been recouped globally due to extraordinary levels of support by governments, central banks and multinational agencies. When looking at the securities market, all would seem okay, but in truth, the health of the global economy is still in quite a precarious place. But, amidst all the confusion, asset classes classified as Alternative Investments have done quite well during this period. In this week’s issue, we seek to explore the idea of alternative investments, their performance, the benefits of the inclusion of their portfolio and our outlook for this asset class.
Characteristics of Alternative Investments
Truthfully, there is no one fixed definition for this asset class. It is categorized as all forms of securities that are financial assets that do not fall into one of the conventional equity/income/cash categories. The simpler forms of alternative investments include Private Equity, Hedge Funds, Private Credit, Art and Antiques, Commodities and Real Estate. Empirically, alternative investments offer common features to an investor’s portfolio, including:
- Low Correlation To Traditional Investments Like Stocks And Bonds
- Higher Return Potential Than Traditional Investments
- More Esoteric And Oftentimes Illiquid Assets
- Longer Lock-up Of Periods, Meaning Shares Or Interests May Not Be Able To Be Redeemed/Sold On A Daily Basis. This Helps Allow For Exposure To Less Liquid Assets
- Often Complex Investment Structures And Risk-return Profiles
- Typically, Higher Minimum Investment Requirements
- Unique Risk Profile That Should Be Understood Prior To Investing
Benefits of Alternative Investments In Your Portfolio
Given the characteristics of alternative investments, a survey completed by Ernst & Young (2019) found that 25% of Assets Under Management were allocated towards Alternative Investments. In 2019, over US$1.18 trillion worth of Alternatives fundraising occurred (US$1.14 trillion in 2018). As of August 2020, there has been US$488 billion in. Fundraising (US$259 billion in Private Equity, accounting for approximately 53% of fundraising). What this indicates that asset managers have increased their positions and risk tolerance for alternative investments. Thus far into the calendar year, the low correlation to traditional asset classes continue to hold firm, with yields within this space still outperforming those of equities and fixed income. In the context of the global investing landscape, alternatives will continue to be a necessary component of any investor’s portfolio going forward.
How to Participate in Alternative Investments
While alternative investments are mainly for the more sophisticated investors, locally, average investors can participate in these securities through exchange-traded funds (ETF) and unit trusts products. These will allow investors to get indirect exposure to these securities also benefit from having diversification and even a hedge in your portfolio against bad times.
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Written by Haughton Richards, FRM, FMVA, Senior Research Analyst |
Conclusions
US Equities suffered their worst weekly declines...
US Equities suffered their worst weekly declines since March, as the resurgence in the coronavirus and election uncertainty weighed on sentiment. With the narrow exception of the S&P 500 Index, the major benchmarks fell into correction territory on Friday morning, or down over 10% from recent highs. The declines were broadbased, but information technology and consumer discretionary shares fell the most within the S&P 500. The small utilities, materials, and real estate sectors held up best, while the Cboe Volatility Index (VIX) reached its highest level since early June.
The week’s US economic data contained some positive surprises...
The week’s US economic data contained some positive surprises and may have limited the declines. Stocks snapped their losing streak on Thursday, seemingly helped by news that U.S. gross domestic product (GDP) had increased at an annualized rate of 33.1% in the third quarter, above consensus expectations of around 31%. Investors also seemed encouraged by weekly jobless claims, which came in lower than forecast and reached a new pandemic low. Continuing claims were more in line with expectations but continued to fall sharply, from 8.5 million to 7.8 million.
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