What you need to know about alternative assets

Personally, I love something that’s a bit different or unexpected. And that’s exactly how I view alternative investments in a portfolio. Alternatives are simply assets that don’t fall into a traditional category like equities, bonds or cash. This leaves a whole range of areas from venture capital to real estate and commodities – and even hedge funds! Because they can be more complex than traditional investments, and sometimes riskier too, they’ve tended to be the domain of the professional or high-net-worth investor. But you and I can gain access to them via a multi-asset fund.

“Know what you own and know why you own it.” — Peter Lynch, mutual fund manager

Why should you consider alternatives?

We all know that having all your eggs in one basket is a bad idea. You drop the basket, and they all break. The same saying is also true for our investments. If you have all your money in one stock or asset class, you are entirely dependent on that one thing doing well. That’s why we talk a lot about diversification. Alternatives tend to have a lower correlation with standard asset classes – they will act differently to equities and bonds – so not only do they add variety to a portfolio, but also a good level of diversification

However, you still have to be careful, as David Coombs, manager of Rathbone Strategic Growth Portfolio, explained in a recent podcast. For example, “20 years ago people were very excited by vintage car funds and art funds and the reality was they were highly correlated to equities during market corrections because when the wealth effect turns negative people look to sell what they can and you tend to find those things you thought were alternative, were not quite as alternative as you think.”

And, just like other more traditional assets, different alternatives will do well at different times. So you have to constantly monitor how much you have allocated to any particular area. James Mahon, manager of SVS Church House Tenax Absolute Return Strategies fund, told us recently about alarm bells in the hedge fund markets and why they’ve reduced their allocation, for example.

Gaining exposure to alternatives

A number of Elite Rated products can offer a varying degree of alternative assets, giving you both diversification and peace of mind that the professionals have put in the research and are adjusting allocations according to the prevailing market environment.

VT Momentum Diversified Income is a global multi-asset income fund with a value bias and the flexibility to invest across all asset classes. These include UK and overseas equities, fixed income, property and specialist investments. Alternatives include music royalties and digital infrastructure.

The Close Managed Income fund invests in both actively-managed funds and exchange traded funds and also has exposure to music royalties. Co-manager Matthew Stanesby explained more about the fund’s construction – including alternatives, such as infrastructure, specialist property and music royalties – in a video interview earlier this year.

TB Wise Multi-Asset Growth fund can invest up to 100% in equities, so the asset allocation can change considerably over time. It has a preference towards out-of-favour areas and currently has 27%* in alternatives including a holding in Elite Rated Jupiter Gold & Silver.

*Source: fund factsheet, 31 July 2021