Investment Team Handelsbanken Wealth & Asset Management
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Shares, bonds and cash are regarded as traditional investments. All other assets can be considered ‘alternatives’, although there is no strict definition covering this asset class.
What makes alternative assets different for investors?
Compared with traditional assets, alternatives are less regulated, while possessing lower levels of transparency and higher fees. Yet their relatively low correlation of financial returns with traditional investments means alternative assets are regarded as key ways to diversify the range of assets held in modern investment portfolios.
A (non-exhaustive) list of alternative assets includes:
This includes gold and other metals, crude oil and natural gas and agricultural output.
The total value of global property (residential and commercial) was estimated at $380 trillion at the end of 2022, according to property agents Savills. This makes property the world’s single largest store of wealth, exceeding the combined value of share and bond markets globally, as well as the value of all the gold in the world.
These will often be managed by specialist managers seeking to earn superior investment returns by focusing on particular strategies. Their higher risk profiles means they tend to be employed more by institutional investors (such as pension funds).
These are often quite sophisticated products. They are usually made up of two or more assets, one of which is a ‘derivative’ (a type of financial contract). Capital protected investments are designed so that investors receive some or all of their capital on maturity. In contrast, market investments exposes all or part of investors’ capital to potential loss.
Specialist private equity firms will pool investors’ assets to buy companies and use their own expertise to increase their profitability/value, at which point they will be resold. Repositioning a company for sale can often take more than 10 years, so investor patience is required.
This provides financing to start-up companies that the venture capitalists believe have the long-term potential to succeed. In return for supplying financing and advice, venture capitalists will often receive a stake in the company or a seat on the board.
History
Human civilisations have long understood the potential value of alternative asset types. Clay tablets recording details of commodity transactions dated from 4500-400 BC have been found in modern Iraq.
In more recent history, the US transcontinental railway, completed in 1869 and funded in large part by private capital, is often considered the beginning of the modern alternative investment industry.
What role can alternative assets play in a diversified portfolio?
Some alternative asset types are well known for being very risky for investors, typically in exchange for higher potential reward. Others – most notably gold – are known (rightly or wrongly) as relative ‘safe havens’ during times of financial market turbulence.
The wide variety of alternative assets means that – as part of a mixed investment portfolio – they can supply one or more of the following benefits:
- Diversification
- Risk management
- Capital growth
- Income growth
Using the examples above, their possible contributions in a diversified portfolio might include:
Inflation protection and diversification
Similar to commodities, plus added benefit of (rental) income
Opportunities for diversification, and (if successful) without compromising on returns
Highly flexible, potentially offering different levels of protection, and can be tailored to specific investor needs
The potential to generate high returns, but linked to a greater degree of risk compared to investing in listed companies
Can capture high growth opportunities, but (again) with high risks
Is investing in alternatives risky?
Alternatives’ low correlation with traditional investments means they can reduce volatility in a portfolio of investments, and improve diversification. However, their potential for higher returns compared with traditional assets like bonds and shares introduces a number of risks, including:
- The difficulty in valuing, buying and selling assets without an official market price (commodities are an exception)
- Greater complexity, with some strategies employing more complex or risky investment techniques like derivatives or short selling
- Some assets, such as private equity, real estate and hedge funds, are less transparent, with a more limited information flow
Without taking on some risk, there can be no potential for reward. The balance of risk and reward is always a core consideration in choosing which assets are suitable for our portfolios, and alternative assets are no exception to this rigorous process.
By following subtly different investment journeys over the long term, alternative assets can help to deliver a smoother returns profile within a wider investment portfolio.
How does Handelsbanken Wealth & Asset Management buy alternative assets?
- We may buy alternative assets directly on a stock exchange, or indirectly via another investment manager if this is the best way of achieving our investment goals.
- Many alternative assets are sophisticated investment products and so we take exceptional care in selecting our assets. This allows us to invest in areas which would not otherwise be available to our customers, enabling us to provide unique opportunities within our multi asset portfolios.
Can my portfolio be constructed using alternative assets alongside other asset types?
Yes, this is the approach we would recommend for most investors. Diversification should be an important consideration when building an investment portfolio for the long term.
One way to achieve this is by a mix of different assets including alternative assets, bonds and shares. Their performance will likely be comparatively less correlated to the performance of mainstream financial assets and can help to generate the desired level of financial returns. Taking a blended approach in this way is often called ‘multi asset investing’.
If you’d like to find out more about the types of financial assets and investing, please continue to explore our Learning Zone, where we have more resources on topic like this one.