What are alternative investments?

TINA has been a much-used acronym in the investment world this year. It stands for ‘There Is No Alternative’ and it has been used to explain the situation where stocks rise because investors invest in them, despite any reservations they may have, as there is no other viable choice.

The ‘alternative’, in terms of an investment portfolio, has traditionally been bonds. As an alternative investment, bonds have the attraction of providing a steady income stream and offering resilience in circumstances where equities struggle – when shocks occur or during a recession. A balanced portfolio would historically include both equities and fixed income investments (like bonds). However, with interest rates so low in all the major economies in recent years, the yields from bonds, and government bonds in particular, have fallen to very low levels, with prices correspondingly rising. Now that inflation has spiked higher, the real yields from these government bonds have fallen deeply into negative territory.

The lower volatility of government bonds and the fact that their returns are normally uncorrelated to equities means they continue to have an alternative investment role in portfolios. However, it also means there is a need to find alternative investments to offset the impact of higher inflation, help fill the gap in income and provide diversification.

Is there a downside to alternative investments?

The number of alternative investment options has increased in recent years, widening choices significantly. But that of course makes it hard to choose between them. Many of these alternative investments have drawbacks:

• They may be made up of illiquid underlying assets
• There may be a lack of transparency, in terms of exactly what the investments are
• Their fee structures can involve high charges.

Market dislocations can also cause problems. Illiquid assets become difficult to value in times of stress and the underlying assets even more difficult to realise. In extreme cases, when a fund holds assets that cannot readily be sold, it can lead to funds being closed to redemptions, as we saw with some open-ended commercial property funds in 2020.

How do I decide on the best alternative investment for me?

The key is to decide what investment outcomes you are hoping to achieve before you pick your selections from the alternative world. Private equity may be a good option if you want capital appreciation, whereas infrastructure, transportation and property are more suitable for diversifying public equity risk and generating income-driven returns, making them a better substitute for the bond part of a balanced portfolio.

Why are infrastructure and transportation sectors looking so attractive for investors?

Investing in the infrastructure and transportation sectors currently looks attractive for three reasons:

1. Many infrastructure investments have built-in inflation protection.
2. There is currently a global push on infrastructure spending
3. Much of this investment is needed to achieve decarbonising goals.

Most infrastructure assets have an explicit link to inflation through their regulatory models, concession agreements or contracts. Those without an explicit link often have the pricing power to deliver inflation matching or beating outcomes, reflecting their strong strategic position.

How is Government spending supporting investing in infrastructure?

Governments are investing significant sums in infrastructure and transportation. The US passed its US$1trn Infrastructure bill in November 2021, with the US$1.75trn ‘Build Back Better’ bill still to come. In the UK the government confirmed a £100bn commitment to investing in infrastructure in 2020/2021, with £19bn available for transport projects. This provides significant opportunities in infrastructure, in addition to those investments from private companies.

Many of these opportunities will arise from the decarbonising agenda, such as the push for cleaner power or electric vehicles, or from increased digitalisation and other areas of innovation. This will future-proof investments, as well as providing a broader platform of investments as more areas are included under the banner of ‘infrastructure’.

What other sectors currently look attractive as alternative investments?

Despite some challenges in recent years, commercial real estate remains interesting. The rental collection from properties provides the cash flow element, but long term there is also an expectation of capital appreciation. The pandemic has had a disruptive effect on retail and office space, as people turned to online shopping and working from home, and it is unclear what a return to ‘normal’ will look like.

Other sectors, such as warehousing, have benefited from increased demand. There are also many funds offering exposure to specialist property segments, including healthcare, where the revenue stream that provides the income element is very reliable as it is largely derived from public- or government-backed sources.

So it seems TINA is too harsh. While the world of alternative investing can be complicated, there are several options open to investors who are not looking to bet the bank on equities but do want to increase diversification and yield.

Find this useful? Want to read more of our current issue of Outlook?

• What net zero pledges were made at COP26 – and how will they impact investors?
• Can I protect my money from inflation?

Speak to one of our experts

If you are interested in learning more about the brave new world of alternatives, please get in touch with us or email enquiries@adamandcompany.co.uk and we will be delighted to discuss opportunities with you.

Please remember, if you hold an account with Adam & Company, you can check your portfolio value at any time, through Wealth Online or by getting in touch with your Investment Manager. 

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

This is not a recommendation to invest or disinvest in any of the companies, themes or sectors mentioned. They are included for illustrative purposes only.

The information contained herein is based on materials and sources deemed to be reliable; however, Canaccord Genuity Wealth Management makes no representation or warranty, either express or implied, to the accuracy, completeness or reliability of this information. Canaccord is not liable for the content and accuracy of the opinions and information provided by external contributors. All stated opinions and estimates in this article are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information.