02 Sep 2020
Why high net worth individuals are looking to alternative investments post-Covid
As investors navigate the post-Covid-19 market, the appeal of alternative investments is steadily growing. With the long-term economic impact of the pandemic still yet to be seen - and no sign of greater clarity on the horizon - many are turning to alternatives as a way of strengthening and diversifying their portfolio.
Investments in areas that may have previously been difficult to access - due to being rather illiquid or considered too ‘niche’ - are becoming increasingly viable for investors seeking to expand their portfolios.
Defined as financial assets which fall outside of conventional investment categories - such as stocks, bonds and cash - alternative investments don’t typically correlate with the stock market. As such they can add diversification to an investor’s portfolio and help to manage volatility.
For many, the luxury asset space has been one such alternative, particularly as fine art, luxury vehicles and jewellery have historically been known to retain or increase in value. Despite their popularity however, these assets are largely illiquid and can thus be unsuitable for investors looking to generate a regular income.
More recently, however, the increased availability of alternative investments is offering up a wider range of options - many of which appeal thanks to their promise of more sustainable long-term returns. For some investors, this also comes with the benefit of investing in areas in which they hold a personal interest, which I shall go on to explore in further detail.
First, let’s consider the forecasted growth in alternative investments.
Growing interest in alternatives
According to alternative assets specialist Preqin, the alternative investment industry is expected to grow around $14trn by 2023, mostly due to alternatives’ track record and ability to deliver superior risk-adjusted returns to investors. With interest growing in this space, so too is accessibility to alternative investments via investment trusts and mutual funds, as investment managers seek to fulfil growing demand.
As a result, investments in areas that may have previously been difficult to access - due to being rather illiquid or considered too ‘niche’ - are becoming increasingly viable for investors seeking to expand their portfolios.
What are we seeing today is that many of these areas are also being catalysed as a result of Covid-19.
As the underlying foundation comprising most basic community services and facilities, infrastructure by definition can be considered a crucial asset class - and is one of the key areas witnessing an uptick in interest from investors.
Infrastructure in this sense can be wide-ranging; from hospitals and schools, to emergency services and transport networks. Infrastructure projects are frequently government-backed, and often offer a long term income stream.
Through the use of close-ended vehicles such as investment trusts, infrastructure investments have now become more accessible to the everyday investor. Thanks to their flexible structures, these investment trusts also have impressive dividend track records compared to traditional open-ended funds. According to Helen Bradshaw at Quilter Investors, two infrastructure investment trusts - HICL Infrastructure and International Public Partnerships, have increased their dividend payouts year-on-year for more than a decade.
In this respect, investors who are keen to use their money to support communities can do so with reassurance of sustainable income. It’s worth considering, too, that, as Covid-19 restrictions ease, we can expect to see governments spending more on areas like transport and digital infrastructures to facilitate our new-found remote working lifestyles.
In recent years, sustainable investing has experienced growing traction as investors turn their attention towards the pursuit of environmental, societal and governance-focused goals. Meanwhile, from an environmental perspective, global travel restrictions under Covid-19 have offered a glimpse - albeit fleeting - of what life might be like if we collectively lived more sustainably.
For the environmentally-conscious investor, investing in renewables as an alternative could be a viable option to diversify portfolios, while contributing to a sustainable cause.
According to a recent study by Imperial College London and the International Energy Agency, investments in renewable energy in the UK yielded returns of 75.4% over a five-year period, compared to just 8.8% for fossil fuels.
These investments were also less volatile compared to the performance of fossil fuels, holding up well during the pandemic, and thus pointing to a safe investment choice for investors seeking straightforward yet sustainable returns.
Others may seek returns from more entrepreneurial projects. Investors with a keen eye for developing industry trends have the opportunity to develop a diverse portfolio, not least at a time when the pandemic has created an unprecedented extent of market disruption.
Although Covid-19 has stunted the growth of particular business sectors such as hospitality and travel, other industries - including technology, healthcare and automation - have quickly seen their prospects catalysed. Law firm Pinsent Masons suggests that private equity funders will shift their investments into infrastructure and technology firms in the short-term until economic uncertainty dissipates, demonstrating the faith investors are placing in these industries.
There are many examples of how and where this may apply in practice. In terms of technology we will see a huge increase in demand for cloud and virtual environments, for example, as our lives - both professional and otherwise - move all-the-more online. Meanwhile, the pandemic has highlighted global issues of insufficient capacity and resilience within our current healthcare sector. It is not unlikely that we will see a growth of private equity investments in healthcare firms seeking to address these challenges.
Looking to the future
The next few months will be a decisive period.
Many investors will be taking this moment as an opportunity to assess their portfolios. What has been the short-term impact of the pandemic on balance sheets thus far? Where are the longer-term growth areas and fundraising opportunities? And how might I be able to diversify my portfolio for future resilience?
For many, a balanced asset plan, which takes advantage of alternative assets, will be front-of-mind for those seeking to safeguard for the future. The right partner can help you make smart and informed decisions during uncertain times.
This article is for general information purposes only and should not be used or relied upon as professional advice. It is advisable to contact a professional advisor if you need financial advice.