Appetite for alternative investments is growing. Increasingly, experienced investors are opting to add assets outside of the mainstream to their portfolios – as evident in research from Connection Capital, which found that 74% of high-net-worth investors (HNWIs) are now allocating more than 10% of their portfolios to alternative investments, up from 68% of investors in 2021 and 50% in 2018.
This is unsurprising given the performance of mainstream assets of late. Cash is failing to provide investors with a worthwhile return, with the best available rate on a standard, instant-access savings account just 1.81%, and this drops to 1.55% on a tax-free, instant-access Cash ISA.
Meanwhile inflation is at a 40-year high of 10.1%, and the Bank of England (BoE) warns it could reach 13% by the end of 2022. Clearly, cash interest rates are not keeping pace, posing a real risk to the value of an investor’s capital.
The equities market has also experienced a particularly volatile several years. As an example, the S&P 500 posted its worst first-half performance since 1970 in the first six months of 2022, falling 20.6% as global markets react to current events such as the fallout of the Coronavirus pandemic and the war in Ukraine.
Alternative investments are uncorrelated with these mainstream assets, making them key for diversification. And many have proven themselves to be resilient during times of economic turbulence – such as residential property bonds, with the UK’s housing market boasting exceptional performance of late.
Cerulli Associates found that of an increasing number of financial advisors looking to diversify their clients’ portfolios with alternative investments. 70% stated “reducing exposure to public markets” as the core reason, and 66% were aiming for “volatility dampening” and “downside risk protection.”
Investors’ disillusionment with mainstream assets and their high-growth potential has likely contributed, at least in part, to the growth of alternative investments. But there are a number of other ways in which alternatives can provide a boost to an investor’s portfolio, including opportunities to invest for impact and passion.
Investing for impact with alternative investments
More and more investors are looking to do good through their investments, with Big Society Capital’s Market Sizing Report finding that the value of social impact investments has risen eightfold in under 10 years, up from £833 million in 2011 to £6.4 billion in 2020.
And there are an abundance of methods of doing so within the alternative investment landscape, resulting in opportunities for investors to benefit not only from the attractive potential returns offered by alternative assets, but also to invest for impact.
Firstly, consider property bonds. Their purpose is to provide builders, typically small and medium-sized housebuilders, with alternative finance to contribute to the development of new housing.
As the UK has been facing a housing shortage for decades – a shortage which the Government and other experts have reiterated time and again requires SME housebuilders to tackle – this is crucial.
What’s more, investing into property bonds (and by extension, SME housebuilders) aids in creating local jobs, regenerating communities and can even have environmental benefits, as small and medium-sized builders are increasingly developing and utilising more environmentally friendly, modern methods of construction.
Property bonds are also often Innovative Finance ISA (IFISA)-eligible, rendering all returns free from income and capital gains tax, and their target returns are typically in excess of 7%. This means attractive, tax-free potential returns for investors whilst their capital is helping to create a positive impact.
A “green IFISA” is also an option for investors with a particular interest in environmental impact investments, whereby you can help to fund green energy and infrastructure projects.
Turning to venture capital investment opportunities, there’s the potential for investors to support the next wave of business in the form of early-stage, high-growth startups that in turn creates jobs and make a significant impact on the wider economy.
Passion investing with alternative investments
With such a range of alternative assets available – including collectables such as fine art, fine wine and vintage cars – it’s likely that even niche-focused investors could find a passion investment to add to their portfolio, resulting in opportunities to target attractive returns whilst investing into assets they have a vested interest in.
But though those mentioned above may be the most obvious examples of passion investments, investors in fact have a much wider scope to invest in their passions using alternatives than some may think.
As an example, this could be a desire to invest into a particular area. Investors passionate about inward investment into their local region could choose location-based venture capital investments, helping to scale businesses and create a localised multiplier effect to the economy, in turn aiding in the creation of jobs and advancing the area more generally.
With venture capital, there are also opportunities to invest into startups within a particular sector of interest, such as fintech or pharmaceuticals.
Looking back at property bonds once more, it’s also possible to invest into those that are financing housing developments in a specific location. This could be particularly attractive to investors who have a focus on providing much-needed housing to an area of interest and in-turn generating both societal and economic benefits.
Boosting your portfolio with alternative investments
There are a multitude of alternative assets available to investors, and they’re now more accessible than ever with the growth of platforms facilitating investments into the likes of property bonds and venture capital.
With it likely that there is a suitable option for most investors' portfolios, and due to their lack of connection to most mainstream assets, they can be vital for adding an all-important element of diversification whilst also providing opportunities to invest for impact and passion.
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