Most of us have heard of the main traditional asset classes: shares, property, fixed interest and cash, but alternative assets are less well known. However, these types of assets can provide further diversification – and enhanced returns – for your investment portfolio.
Alternative investments are those found outside the traditional asset classes. Typical ones include unlisted real estate, private equity, venture capital, infrastructure, renewable energy, hedge funds, commodities, and private debt. Generally these are assets that aren't linked to the performance of the share market so they can perform when share market returns are down or flat. This means it adds a layer of diversification - you're not 'putting all of your eggs in one basket' and seeing all asset classes suffer at the same time.
Low returns increase interest in alternatives
In this low interest rate environment, which tends to mean lower returns for cash and bonds, ANZ Smart Choice Super is changing its asset mix – as per the table below – by adding alternative investments to ensure it can help members grow their super and retire comfortably.
Alternative investments differ to publicly available funds as they're part of the private investment market and aren't easily accessible for the everyday person.
Typical alternative assets include:
Infrastructure assets are known for providing long-term, stable and predictable cash flows. Our investment focus is likely to remain in opportunities within energy production and transmission but we expect to expand to newer sectors such as agriculture infrastructure and renewable energy, particularly wind-powered energy and a selection of solar-power opportunities.
The private equity sector enables us to invest in a range of companies that are not publicly traded on public stock exchanges. The advantage is that by investing at the start of a company's lifecycle, it's possible to generate strong risk-adjusted returns and benefit from high earnings growth when compared to listed markets.
We will also invest in real estate funds as real estate has a low correlation to shares but is often considered to work well with inflation as rent and property values tend to rise as inflation rises. This asset class has evolved over time to include data and medical centres, retirement homes, childcare and storage facilities, as well as commercial real estate debt, which provides loans to commercial borrowers who need funding for real estate purposes.
What this means for you
Adding a range of alternative investments to a portfolio is expected to increase the investment return prospects available to investors while complementing the current investment mix. The improved performance is because alternative investments are generally less impacted by daily market movements in the way that other assets are. For example shares and bonds can be quickly affected by changing market, social and economic events. Therefore, the overall volatility, or the 'roller-coaster ride' of increasing and decreasing valuations, should reduce when funds include a proportion of alternative assets into their mix.
The good news is, for ANZ Smart Choice Super members, we'll now include Australian and global funds that have exposure to infrastructure projects, real estate, private equity and credit to help keep our members on track for a comfortable retirement.
Not all alternatives are equal
Of course, it's not as simple as just deciding to add an allocation of alternative investments into the mix. Alternative assets need to be carefully researched and reviewed in order to find the most appropriate options for each particular fund. They need to be carefully weighed up against other asset classes and sectors to ensure the most appropriate levels of risk and reward that will support our members to achieve a comfortable retirement. This means management costs are higher, but it's expected this will be offset by the higher returns the investments will generate.
Want to know more?
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