Guest article: What alternatives are there for investors?

Guest Blog | Sat 13 Oct | Author – Business & Finance

Alternative sources of investments for investors — Rory Gillen 

Risk and return is the R&R that drives the investment sector, and portfolios are managed to produce acceptable levels of risk and return, determined by the investor and their purpose and timeframe.

Conventional investments like stocks, bonds and cash are the mainstay of most investment portfolios.  Historically, equities (stocks) will outperform most other investments, over a reasonable time horizon.  But, we are advised to expect lower returns going forward; balanced portfolios likely producing returns below 3%.

Although, there is no reason for any fear around equities, particularly if you can invest regularly and take a minimum five-year view, or longer, ideally!

Risk is generally unpalatable, but where investors need to avoid it, the downside is diminished return.  Investments like bank deposits and Government bonds that mitigate the principal economic risks of recession, inflation and deflation carry little or no return.

The question then arises as to which alternative risk assets are worth considering to potentially improve return for investors who do not want full exposure to equities?

Gold, for example, is an excellent protector of capital against banking systems and countries that go bust.  It covers risks that other assets simply cannot.  It is also a good inflation hedge over the long-term, but not necessarily short-term horizons.

Gold is not a productive asset and, thus, offers no income or growth potential.  But, especially on account of the risk cover, it should probably be included in any truly balanced or mixed asset portfolio.

Renewables assets as investments

Government-sponsored renewable wind energy assets, offering high income and quasi-Government guarantees, also come recommended.  Investors can look at Greencoat Renewables plc, currently the only renewable energy operator listed on the Irish Stock Market.

The annual dividend yield is around 4.8% ahead of the annual fixed yield to maturity from an Irish government 10-year bond, which appears acceptable for the risk levels, making it an attractive risk-diversifying alternative asset.

Floating rate notes and bonds are in favour too, where the interest coupon adjusts upwards, if and when interest rates rise.   However, as most private investors would be unable to assess the credit risk in companies, the advice here is to invest via fund structures.

Similarly, peer-to-peer lending platforms should be approached with caution, unless the investor is sure that adequate credit quality analysis is happening, which is not always the case.

A combination of conventional and alternative investments can help mitigate risk when investing, and, importantly, drive higher return.  But, as with any financial decision, the advice has to be to take good advice!

Hedge funds, for example, have not delivered good inflation-adjusted returns in the last decade.  In fact, investing in hedge funds has added no value, over owning traditional assets, and has been a frustrating and costly experience for some.

Fans of cryptocurrencies may present them as a new medium of exchange and, like gold, a new way to settle trades outside of the banking system.   But that does not mean the likes of Bitcoin represent a store of value and, without intrinsic value or some alternative use value, you would have to believe their prices will go to zero, or close to it, in time.

Diversify risk and return drivers for investments

There are, of course, risks with alternative investments too, but these are different to equity risk, and it is important that investors diversify both their risks and return drivers.

The message, as always; if you need to take a cautious approach, accept the lower return.

But, worth thinking about is whether you really need to take this lower risk, particularly if you are a regular investor or someone with a long-term investment horizon?

This is a major issue for many pension accounts in Ireland, as the natural inclination is for savers to take the middle ground.  But this may not serve certain people too well in retirement. It is important to remember that certain alternative investments really do merit real consideration, ahead of non-risk assets.

Rory Gillen is the Founder of GillenMarkets and has nearly 30 years’ experience in the Irish financial services industry, with NCB stockbrokers, Zurich Life and Merrion Capital, which he co-founded, and where he was Director of Equity Research.  He is author of a number of investment guides, delivers investment training seminars, and is a regular media commentator on investment related issues.