Provided by Mercer: 31/7/08
Financial markets in turmoil, skyrocketing petrol prices, lower superannuation balances - it’s enough to drive you to drink.
Want diversity?
For investors looking to add some diversity to their portfolios and buffer them against volatility, alternative assets are an increasingly popular option. Alternative investments can be pretty much anything that’s not a mainstream asset (i.e. international and Australian shares, property, cash and fixed interest). They can include private equity, hedge funds, infrastructure, and emerging markets such as Brazil, Russia, India and China, as well as art, commodities (principally gold), antiques and wine.
In these unstable times, investors are looking at alternative asset classes with growing interest. Alternatives, the theory goes, can help reduce risk, while maintaining the expected long-term level of return or they can be used to boost returns with a similar overall level of risk. They do so by offering an additional source of diversification within a portfolio that helps smooth out any short-term volatility.
In the main, investing in alternative assets has been something the professionals do. For interested individuals, you may wish to check if there is an investment option within your superannuation fund which has an exposure to alternatives. For self-managed superannuation funds (SMSFs) looking at alternative assets, care needs to be exercised due to the existence of the sole purpose test. It requires all superannuation funds to be maintained for the sole purpose of providing old age and retirement benefits to fund members. In a practical sense it means you can’t hang the work of art you’ve invested in via your super fund on your wall (but you may be able to rent the artwork out on arm’s length terms) and you can’t drink the vintage wine you’ve got cellared either!
So how alternative should you be?
In the past, the generally accepted wisdom has suggested that alternative assets should make up around 5-10 per cent of an investment portfolio - recently this has changed, with some portfolios containing between 20 and 40 per cent. A new study in the United States, for instance, has found that the top US institutional investors are expected to allocate more than 22 per cent of their overall portfolios to alternatives by 2010.1
As always when taking a path less travelled, it’s important to do so with a pretty good – and up-to-date - guidebook. In deciding if your portfolio could benefit from the inclusion of more alternative assets, you should talk to your financial adviser about the potential pitfalls. Alternatives can be expensive so check the fees (and there may be several layers of these i.e. base, performance and underlying investment manager fees). They can lack transparency and liquidity, may have complex legal/tax structures, and can be difficult to research and compare with other funds due to their niche nature and relatively limited performance history.
Finally, remember that superannuation is a long term investment.
While you should review your investment strategy, you don’t necessarily need to change it – keep in mind that every market downturn in history has historically been followed by an upswing. Speak to a licensed, or appropriately authorised, financial adviser to find out all the options available to you.
1 Source: JP Morgan Asset Management, Next Generation Alternative Investing, July 2008
Seek advice
If you have any concerns or questions about your investment strategy and would like to speak with a Mercer financial adviser, please call us
on 1800 633 403.
More information
Find out What type of investor are you?
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
