How unappealing mainstream options have bolstered alternative investments

By Jo Bentham28th July 2021

Against an uncertain and ever-evolving investment landscape, a volatile equities market and rock-bottom interest rates, it’s unsurprising that experienced investors are turning to alternative investments uncorrelated with factors affecting more mainstream options.

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In 2020, the UK and US equities markets suffered losses circa £3.8 trillion in a single week in response to the Coronavirus pandemic, before beginning their bounce-back as lockdowns ended and the vaccine brought with it cautious optimism.

But following over 12 months of fluctuations, markets started to fall again in May 2021 amid spiking inflation fears and worries surrounding the COVID-19 Delta variant – with the FTSE 100 wiping £44 billion off its value on 19th July 2021, its lowest closing point in over three months. 

Meanwhile, the Bank of England dropped its base rate to 0.1% in March 2020, with the Bank’s committee voting in June 2021 to keep it at this record low level “until the economic outlook in Britain is more certain”. 

This combination of severe stock market fluctuations and plummeting interest rates has resulted in some experienced investors rethinking the weighting of their portfolios.

Research from NextGen Cloud focused on UK investors with a portfolio value in excess of £10,000 found that 43% are now more likely to consider alternative investments compared to before the economic impacts of COVID-19, most notably the low interest rate environment commonly now seen.

With often inflation-beating potential returns on offer, a number of assets to choose from – from venture capital and hedge funds, through to collectables and peer-to-peer lending – and tech-enabled platforms democratising alternative investments, they’re becoming an increasingly attractive consideration against an unsettled economic backdrop. 

 

The rise of alternative investments

The potential of alternative investments has not just been discovered. Experienced investors have been aware for some time of the importance of adding assets that differ from the mainstream to their portfolios in a bid to target higher returns. 

But before technological advancements that brought rise to platforms which more easily enable investment into the likes of property bonds and cryptocurrencies, access to alternative assets for most investors was limited.  

And though it’s now easier than ever to invest into these potentially lucrative alternative investments, it’s crucial to remember that with higher target returns come higher risks. Even experienced investors should seek independent advice when looking to invest, and it's important to keep in mind that all alternative assets will not be suitable for all investors – finding one that fits with your appetite for risk and investment goals is critical. 

One of the most publicised examples of alternative investments in recent times is cryptocurrency, with Bitcoin – the market leader – in particular now a household name.

But for those experienced investors looking to diversify away from the volatile nature of equities, cryptocurrencies may not be the obvious choice due to their tendency to be unpredictable. 

As an example, a single Tweet from Tesla CEO Elon Musk in May 2021 – which stated that Tesla would no longer accept Bitcoin as payment for its cars – caused the entire cryptocurrency market to crash. This was following Tesla’s investment of $1.5 billion (£1.1 billion) in Bitcoin just months earlier, which sent the popular cryptocurrency soaring 14%. 

An alternative investment less prone to fluctuations and one with a promising outlook due to their association with the positive acceleration of the UK housing market, fixed-term property bonds offer experienced investors hands-off access to the ever-popular property sector with potential returns often between 4% and 8%. 

These could be an attractive alternative to traditional, low-yield bonds for experienced investors looking to rethink their 60:40 stocks to bonds portfolio in particular – but remember, their higher potential returns in comparison to the likes of Government bonds reflect their higher risks.

With the Consumer Price Index placing inflation at 2.4% in the 12 months up to June 2021, property bonds could be effective at diminishing the impacts this rising inflation has on an experienced investor's portfolio.

In addition, when paired with the significant tax advantages on offer when investing via an Innovative Finance ISA (IFISA) – which renders all returns free from both income and capital gains tax – the potential to maximise target returns grows further. 

This becomes more apparent when considering that to achieve a return equivalent to 7% within the IFISA wrapper, investor’s would need to be targeting a return of over 12% outside the wrapper. 

And property bonds aren’t the only alternative investments benefited by generous Government tax incentives. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) help investors into venture capital opportunities offset some of the risks associated with investing into early-stage businesses – offering income tax relief, inheritance tax relief and loss relief among others. 

 

Adding alternative investments to your portfolio

As UK households are estimated to have accumulated over £200 billion in excess savings since the beginning of the pandemic, whilst the past 18 months have seen all-time low interest rates and a hugely volatile equities market, it’s no surprise that many experienced investors are turning to alternative investments to both rebalance their current portfolios and invest any surplus cash. 

With property bonds and venture capital enabling investors to take full advantage of some of the sectors proved to be most resilient throughout the Coronavirus crisis – with a housing mini-boom ensuing post “lockdown one” in the UK and Q1 of 2021 witnessing more than £5.1 billion of investment made into VC opportunities – the growth potential of alternative investments appear to be being realised more than ever before.