Insight From Our Chairman: How Alternative Investments Can Aid in Combatting Volatility

Throughout the past 40 years, I have been involved in an array of alternative investment assets. With a notable focus on property, I have witnessed both the cyclical nature of the housing market and the growth of alternative methods of property investment – outside of the well-known buy-to-let route, for example – and am a firm believer in the importance of alternatives as part of a well-diversified portfolio.

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The growing popularity of alternative investments in recent years has been clear, in part due to the ongoing market volatility and rising interest rates that have bred turbulence in the traditional investment landscape of late. As UK Government bonds forecast their biggest loss since 1987 and the London Stock Exchange loses its position as Europe’s most valued stock market in recent weeks, the past month alone has been a reminder of this trend. 

Many of us who have previously been staunch followers of the traditional 60:40 stocks-to-bonds portfolio have found diversifying with alternatives – whether it be property bonds, venture capital or even cryptocurrency – an effective means of mitigating volatility and enhancing potential returns, whilst still having the ability to tailor our overall portfolio to our risk appetite and general preferences and requirements. 

This is clearly reflected in investor data. In 2017, PwC estimated global alternative asset allocation to be valued at £11.2 trillion, whilst today this figure has risen by 33% to circa £15 trillion. Forecasts also suggest this could rise by a further 40%, to £21.1 trillion, in 2025. 

This data is relatively unsurprising when taking into consideration the backdrop faced by investors today. Though the fixed income (the “40%”) element of a traditionally balanced portfolio worked well when equities were climbing steadily and interest rates were close to 0%, generating returns from this split has become increasingly challenging following the fluctuating interest rates and volatile inflationary environment recent times have posed. 

But that doesn’t mean we should steer clear of traditional strategies altogether. We must still ensure our portfolio reflects the optimal balance for our personal investment goals, with an alternative asset allocation of between 10% and 15% not unusual to see now. This allocation can comfortably include a varied mix of assets – which has become increasingly possible due to the democratisation of access to alternatives, which were once only a viable option for the ultra-wealthy – that can diversify asset exposure. 

This mix could include investment into property, a long-time investor-favoured asset whereby returns have historically outpaced inflation. Though the UK housing market has certainly been impacted by recent microeconomic pressures, it remains remarkably buoyant, with demand continuing to be high whilst decades of housing undersupply creates a widening gap that the likes of property bonds in particular are critical in closing

And when investing into property bonds under the IFISA tax-wrapper, targeting returns often in excess of 7% that are completely tax-free – an important consideration particularly after the Chancellor’s Autumn Statement, which revealed significant income, capital gains and dividends tax threshold cuts – this can be useful risk mitigation. 

Ultimately, as the shifting motions of the global economic backdrop continues to dictate market patterns and the accessibility of growth-focused, alternative investment opportunities broadens, whether your portfolio is weighted more toward traditional or alternative investment opportunities, keeping track of how both landscapes adapt over the coming years should be a key priority for any investor.