Are alternative investments the perfect complement to shares?

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Are alternative investments the perfect complement to shares?

While shares generally make up the bulk of most people’s investment portfolios, some investors may be tempted by alternative assets. They could include items such as rare stamps, classic cars or fine wines, for example.

As well as offering diversity, such assets could deliver high returns in the long run. For example, over the last 12 years an investment in classic cars has risen by over 300%. During the same time period, the FTSE 100 has risen by around 34%.

Correlation

One argument put forward in favour of buying alternative assets is their relatively low positive correlation to traditional asset classes such as equities. This could prove to be highly beneficial to investors, since it may mean that their overall portfolio returns are more consistent over the long run.


While this could improve the risk/reward ratio of their portfolio, it should be noted that some alternative assets such as private equity may have a relatively high positive correlation with shares. This is because they are largely dependent on the macroeconomic outlook to deliver improved performance.

Logistics

One challenge facing investors considering the purchase of alternative assets is accessibility. Buying a classic car, rare stamp collection or selection of fine wines is likely to prove costly. There may also be maintenance costs which reduce overall returns, as well as storage issues and the potential for logistical challenges.

Buying shares is generally much simpler and more cost-effective than buying alternative assets.

While ETFs have made investing in some alternative assets easier for private investors, buying shares is generally much simpler and more cost-effective than buying alternative assets.

Liquidity

Perhaps the biggest negative when it comes to investing in some alternative assets is their lack of liquidity. While it is possible to sell a large amount of shares in a FTSE 350 company in seconds, disposing of a classic car or a rare stamp collection takes significantly longer. Clearly, with an ETF or some alternative assets this may not be the case. However, for many alternative assets liquidity remains an issue.

Income prospects

Although not all investors are interested in income, with inflation moving higher it could become increasingly important over the medium term. Alternative assets such as fine wine, classic cars and rare stamps offer zero income, while the FTSE 100 has a dividend yield of nearly 4%.


In fact, it is possible to obtain a yield well in excess of 5% through buying high-yield shares. Although some alternative assets offer an income return, it may be possible to generate a higher yield from equities at this moment in time.

Outlook

Clearly, alternative assets can offer portfolio diversification, low positive correlation with traditional asset classes, and high returns.

However, in many cases they remain inaccessible to most investors, can be costly to buy and sell, and may also lack an income return. Therefore, while it could be argued they have a place in a portfolio in order to improve the risk/reward ratio, shares are likely to remain the overwhelmingly dominant asset for most investor portfolios in the long run.

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