Where institutional investors lead, should private investors follow?
24 June 2019
Alternative assets are coming into their own for institutions looking to reduce volatility and enhance returns. How feasible is it for individuals to emulate them, asks Head of Funds Lorna Robertson?
Here are some statistics that might make many private investors’ ears prick up. Such is the rising interest in alternative assets from institutional investors that assets under management (AUM) are forecast to hit $14trillion by 2023, up from $9.5 trillion in 2018, according to research company Preqin . Figures from Fidante Partners , an asset manager, put global growth in alternative asset investments at 11% last year, compared to an 8% fall in listed markets and a 12% decline in high-yield bonds.
Should private investors care what institutions are doing and should they follow suit? Clearly, private investors will have a very different risk appetite and liquidity profile, but when the big players start focusing more attention on an area and adjusting their portfolio allocations, it pays to take notice.
Many factors lie behind this trend: a belief that public markets are over-priced, the low interest rate environment, geo-political headwinds which are likely to be weathered better by assets that are less correlated to mainstream market movements. As a true diversifier in times of stress, alternative assets are really coming into their own.
New approaches to the fund conundrum
At the same time, the traditional equity fund space, where liquid funds are managed by big fund houses, is under enormous pressure, seeing significant outflows for poor performance coupled with high fees. Institutions are increasingly moving away from “actively managed” (yet essentially generic) strategies towards cheap, passively managed ETF tracker funds for stocks and bonds on the one hand, and more specialist alternative asset funds that take a differentiated approach on the other.
For private investors interested in emulating – to some extent at least – institutional investors’ shift towards a higher weighting of alternatives, alternative asset funds are a sensible way to do so. Investing through a fund instantly gives access to a diversified pool of assets in a particular sub-sector of interest, managed by experts. And since, through us, it’s possible to invest in funds in £25,000 units, there’s the option of spreading capital even more broadly across several investments with different alternative asset fund providers.
Highlighting the sheer breadth of opportunity now available in this sphere, the Association of Investment Companies has just added 13 new categories to its list of alternative asset sectors, so that areas like music royalties and technology and media are given their own mention alongside existing classifications like UK small companies, commercial property or structured finance. The rise of Millennial investors is likely to change the face of fund investing even more as time goes on, increasing the focus on themes like ESG (Environmental, Social and Governance) investing, or tapping into the zeitgeist in areas like tech and consumer culture.
Finding the right portal
So, what about access? Platform investing – the default option for many investors – needs to be approached with caution. The alternative asset funds space just hasn’t got to that “click and play” point yet, if it ever will - the suitability of such a format for this type of investment is highly questionable. Investors in alternative asset funds need a good degree of reliable information and access to high quality fund managers, so that they can get the full facts before committing and ask probing questions if they want to. The economics of investment platforms would, in all likelihood, rule out such an approach.
Normally, of course, that degree of detail and access would be impossible to get for most individuals acting alone. That’s where, again, we offer private investors an answer, providing a portal, delivering in-depth investment prospectuses, being on hand to answer questions and hosting events where clients can connect with fund managers we have relationships with.
The way forward
Private investors could do well to take a leaf out of institutional investors’ book and re-assess their weightings to alternative assets, but they need to do so in their own way. Not only will their portfolio mix look very different – some institutions are allocating as much as half to the asset class, far outside the comfort zone of most private investors - but their route in will be different too. Gaining access to specialist funds (or indeed direct opportunities) with far more modest entry minimums, but no less high quality due diligence and professional oversight is the challenge. That’s just one of the reasons we started Connection Capital and is why increasing numbers of private investors are speaking to us.