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The aim of the consultancy project is to investigate four alternative asset classes to consider them as a viable investment choice. The main objective of the consultancy was to provide our end-users, such as investors, with useful information and knowledge of the current markets rapidly emerging asset classes; precious metals, collectable cars, wines, and art/antiques. The consultation also looked to provide investors with recommendations on investing in alternative asset classes in conjunction with traditional asset classes such as stocks and bonds. The current project provided an overview of the risks that may be involved with investing in the four alternative asset classes.
Research conducted for consultation included the use of secondary literature obtained from university library, internet based search, and search databases. The research also incorporated primary data with the use of semi-structured interviews of fifteen investment fund managers in the South East England locality that were chosen through purposive sampling technique in order to tap into the knowledge of experts who deal with alternative asset classes.
Results obtained from the research revealed that the four alternative asset classes are considered as viable investments with high return if appropriate strategies are used to diversify the investor’s portfolio and disperse risk. Practical recommendations have been made to aid investors in allocating funds and distributing it through their portfolio to tap into the profitability of alternative asset classes.
Even today, alternative investments are considered as exotic investments that are only reserved for ultra-high-net-worth individuals (HNWIs) and erudite organisations. However, realistically, alternative asset investments are becoming increasingly mainstream. There have been numerous innovations causing alternative investment currently to become available to all investors in various packages, extend to an assortment of strategies and are available to almost all investors (Blessings 2011). Alternative represent various methods to investing across different markets and asset classes. Often times they are a unique mix of fundamental risk factors that define how individual investments are anticipated to perform compared to traditional asset classes. This consultation report aims to analyse and examine four alternative asset classes namely; antiques and art, wines, collectible cars, and precious metals, for investing. Through this analysis investors will have an understanding of the risks and profits that are obtained from investing in alternative asset classes that vary from the traditional stocks and bonds.
Looking beyond the three primary asset classes- stock, bonds, and cash- there are other types of investment that can be used to diversify investment portfolios. They are often termed as “alternative assets” with the term being highly flexible to include physical assets such as real estate or natural resources, or methods of investing such as private equity (Conovor et al. 2007). Considering the increases globalisation occurring, alternative assets have also come to include emerging global markets depending on the geographic regions that use them.
Generally, alternative assets are highly dependent on innovative investing strategies or individual skill that one may possess when it comes to selecting specific investments (Campbell 2005). For example, with collectibles such as art and antiques, investing strategies may depend on the specific properties of the piece of work to derive a value on the investment. According to Skidmore (2010) alternative assets have a lack of correlation with other types of investment which may help the investor in increasing or stabilising their portfolio return.
This consultancy project looks to analysis the chosen four alternative asset classes (i.e. arts/antiques, collectible cars, wines, and precious metals as a choice for investment as opposed to other alternative asset classes as a means for investment in order to increase the price or value of the assets. In order to successfully complete the consultation it is necessary to develop objectives that will guide the consultancy process.
The objectives of this consultation includes;
Overall, the present consultancy project aims to provide an opportunity for contemporary investors to gain access into the market’s rapidly emerging asset classes through the use of information and recommendations provided.
Today, asset managers are exploring new asset classes in order to find those that provide the highest yield due to the current economy’s low interest rates which are predicted to continue for years to come. Investors are also looking for a higher yield in the current environment that is providing low return rates by turning to alternative investments in the hope that they may provide higher and uncorrelated returns. Many alternative asset class investments come with a complexity which only allowed institutional or HNWIs to be prime investors (Anderson 1974).
According to a world wealth report based on 2002 data, it was reported that HNWIs possessed ten per cent (10%) of their financial assets in alternative investments (Merrill Lynch and Cap Gemini Ernst & Young, 2003). The report categorised alternative investments as structured products, luxury valuables and collectibles, hedge funds, managed funds, and precious metals. Merrill Lynch and Cap Gemini Ernst & Young (2008) reported in the world wealth report using 2007 data that HNWIs had reduced the amount of their financial assets in alternative investments to nine per cent (9%).
Historically speaking, private investors; mainly wealth individuals, have placed capital in companies before the onset of the Industrial Revolution (WEF 2015). It was with the onset of mid to late 20th century that the current alternative investment industry began to take shape around the world. Institutional investor interest in the alternative asset classes have grown significantly since the early 1990s (Masset and Wiesskopf 2010; Mochnacz 2013). Interest in the alternative assets have gained intensity over the last decade due to the bust in the equity markets in 2000 coupled with the low yield bond environment had forced investors to shift a large portion of their assets out of traditional investments, public equity and bonds, and into other alternatives (Hubbard and Waltz 2010). According to Russell Investment Group (2005) an estimate of $200 billion had flowed into alternative assets in 2005 alone. Furthermore, in 2006 a report suggested that alternative assets has accounted for 10% to 20% share of institutional investment around the world (Topintzi et al. 2007). The report also predicted that alternatives will make up an increasing share of new allocations by institutional investors which will include high net worth individuals, corporate and public pension funds, foundations, and endowments (Fogarty 2007).
As proposed, the current project had was conducted using the interpretivist research philosophy and inductive research approach. To being with, the interpretivism approach allows researchers to interpret elements of the study, thus allowing human interest into the study. Based on this philosophy of research the position of meaning-making practices of human subjects are the focal point of the scientific explanation (Bevir et al. 2008). It is generally termed as qualitative research and is conducted from an experience-near perspective as the researcher does not begin with concepts that have been determined prior to the research but instead looks to have them emerge from experiences revealed through research in the field (Klotz et al. 2007).
The interpretive approach relies greatly on naturalistic methods which include interviewing, observation and analysis of text. This is evident in the current project as the researchers had used the methods of semi-structured questions posed to investment fund managers in the South East of England who are knowledgeable of alternative assets classes, specifically wines, collectible cars, art/antiques, and precious metals as a viable investment. Using this philosophy the researcher was able to ensure that adequate dialog was ensued between the researcher and the interviewees in order to collaboratively construct a meaningfully reality. Angen (2000) had asserted that evaluating research from an interpretivist perspective means having to carefully consider and articulate the research question, have ethical validity, and substantive validity.
Furthermore, inductive research approach was essential to conducting the current consultancy project as it research required to explore the topic from specific observations to broader generalisation and theories to comprehend the investment feasibility of alternative asset classes. The inductive approach is often referred to as the “bottom-up” approach as the researcher is moving from observation, pattern, tentative hypothesis, to theory. This was the most suitable design for the current research as the consultancy project is looking to comprehend the use of alternative asset classes in regards to the contemporary business environment. The strategy used for development of research methods was suitable for secondary data sources.
The semi-structured interviews were conducted using fifteen (n=15) participants who were investment fund managers. In order to choose the participants, purposive sampling technique was used in which specific requirements were set to obtain individuals that were to be sampled such as specialist knowledge in alternative asset classes, specifically wines, collectible cars, arts/antiques, and precious metals. Other criteria included was capacity and willingness to participate in the research. To be specific, the type of purposive sampling technique used was expert sampling in as the current study needed to be enriched with knowledge that only individuals with the specific expertise can provide. Participants were selected from the South East of England locality which included Berkshire, Buckinghamshire, East Sussex, Hampshire, Kent, Oxfordshire, Surrey, and West Sussex. A quick search from the internet provided a list of investment fund managers within these areas.
Once a total list was composed participants were eliminated based on their expertise, those with experience and expertise in alternative asset classes were considered. Further elimination of data occurred when investment fund managers were contacted. First contact was made through e-mail in which introduction of the researcher was made and the consultancy project and further through telephone. After which, fifteen investment fund managers had agreed to provide the interview.
Secondary data was obtained from the university library and through database searches from the internet and university library database. From the databases academic peer-reviewed literature was searched that focused on alternative asset classes. It is noted that a majority of the literature found did not refer specifically to the asset classes of choice (i.e. arts/antiques, collectible cars, wines, and precious metals). This is because these specific four classes are emerging recently as an investment choice to individual investors that are not considered as institutional investors or HNWIs. Empirical data was also considered for this consultancy report even though it is a qualitative research paper in order to understand the profitability and risks associated to these alternative investment choices in comparison to the traditional asset class.
Alternative investments are commonly used as a method to reduce overall investment risk through diversification. Often times, alternative investments carry the characteristics of being (as cited in Burton and Jacobsen 2001; Campbell 2005; Conovor et al. 2007; Eling and Marek 2011; Fassas 2012);
Based on review of the literature and data acquired from investment fund managers, the four alternative asset classes were able to offer three potential advantages to an investment portfolio: diversification, higher return potential, and access to innovative investment strategies. The advantages obtained from investing in art/antiques, collectible cars, wines, and precious metals are explained as;
It is reiterated that diversification does not always assure profit or loss. Instead, alternative investments cover diverse range of categories, styles, and philosophies which are different in with each investment fund manager who are responsible for running them. Even though it was found that investment managers had differed in their individual risk and return characteristics they did share common characteristics that overlapped within the alternative asset class investments.
One the most important aspects discovered is using alternative asset classes to spread risk. When diversifying into other asset classes and investor is able to spread the risk as the more places in which an investment is place there is a decreased chance that the overall portfolio will be damaged in case a single asset class slumps. The alternative assets of wines, arts/antiques, and collectible cars come with an added underlying physical value. These assets have an intrinsic value that is seen to be above and beyond its investment value. According to Blessings (2011) alternative asset classes are extremely well performing when it comes to hedging against inflation. Campbell (2005); Conover et al. (2007); and BlackRock (2011) affirms that when inflation occurs the currency can buy less of a given basket of goods, but if an individual is the owner of these good there is more of monetary value for each of them. Investment fund managers confirmed that during inflation asset class of precious metals and collectibles have the tendency to increase in value and recommend that it is wise to investment some funds into these (Black Rock 2010). There are also added lifestyle benefits associated with alternative asset classes. Investment fund managers state that investing in art, antiques, and other collectibles such as cars and wines can be an enjoyable hobby in addition to diversification of the investor’s portfolio (Blessings 2011). There is also the probability of that many of the investing expenses can be deducted if they are itemised allowing the investor to strain extra savings out of the cost of acquiring these alternative assets.
The four alternative asset classes were further scrutinised using tools such as the PESTLE analysis, SWOT analysis, and Risk Review Framework. It is critical to understand the risks and challenges that are associated to alternative asset class investment in order to make more informed decisions towards the investment. Often times, investors seek to operate in markets that are known to complex, competitive, and global markets that vary in products and asset classes. This bring with is an exposure to uncertainty that is viewed as a risk and is categorised into systematic risks or non-systematic risks. According Blessings (2011) systematic risks are those which entail the challenges created by the unpredictability and volatility of the market. Andrews and Benzing (2007) states that at times of high valuations it is recommended to exit an investment at favourable prices and obtain a good return as it is the easier route. However, at times of low valuations and depressions in a market it becomes difficult to exit the investments made for good returns but the circumstances do bring about a range of opportunities for investing in attractive valuations. Non-systematic risks are applicable to only specific investments which is in contrast to the above which affects the entire market. Markowitz (1952) confirms that this can be eliminated through adequate diversification within asset classes.
Risk Review Framework
Interest Rate/Currency Risk
Professional advice and arbitrage knowledge needed when considering investments that need currency and interest rate swops.
Each alt. investment holds its own transaction risk. Mitigation will include detailed due diligence and on-going reporting.
Over concentration of investment funds towards one alt. asset or industry needs to be avoided and controlled.
Investor fund manager compliance and security is to be managed by investor to ensure discrepancies.
All alt. investment consideration need to take into consideration applicable governance rules
Alt. investment considerations need to take into account ESG framework and rules.
Seeking an investment partner that has ability to handle counterparty through negotiation, management, and diversification.
Table 1- Risk Review Framework for Four Alternative Asset Classes
In addition to risks outlined above it is essential that investors consider other risks associated with investing in the four alternative asset classes. Below is a PESTLE review of risks that are identified as associated to the four assets found in literature and through interviewing investment fund managers (Blessings 2011).
Impact on Investment Strategy
(Opportunity or Threat)
· Foreign trade regulations
· Stability of government
· Terrorism/Crime Issues
· GDP decrease
· Inflation instability
· FDI decrease
· Cost of living
· Increasing cost of goods
· Lifestyle changes
· New tech development, emerging trends
· New products
· Environmental protection laws
· Sustainability awareness
· Environmental protectionism
Table 2- PESTLE Analysis of Four Alternative Asset Classes
It is essential for the investor to understand existing and perceived challenges when investing funds in the four alternative asset classes. Each of the points have been given a rating using the scale 1-10 with 1= weak and 10=strong.
Changing global environment
Credit crunch/down grade
Niche investment market
Strong selling point
Unique business model
Innovative service solution
Diversification of portfolio
Association with strong brand
Poor investment choices
New to market=unknown territory (sustainability investment)
Table 3- SWOT Analysis of Four Alternative Asset Classes
From the above risk review framework, PESTLE, and SWOT analysis the perceived risks associated with the four alternative asset classes have been identified. It shows that the risks and challenges associated which such classes of investment are real but the risks associated can be mitigated using a realistic approach as well.
Notwithstanding the unique risks that are involved in alternative investments they are considered a useful tool in improving the risk-return aspects of an investment portfolio. As mentioned they have the ability to increase diversification, reduce volatility, give low correlations to traditional investments and offer the end-user enhanced returns due to the fact that there is wider investment opportunity. The graph below illustrates a Markowitz efficient frontier by representing low risk portfolios that have been measured using volatility as a factor for a given return. It is evident that from the inclusion of the four alternative asset investments results with the efficient frontier moving up and to the left (Baird Private Wealth Management 2013). Thus, for a given level of return the risk is lower or vice versa with a given level of risk the returns are higher.
Figure 1- Markowitz Efficient Frontier (Source; Baird Private Wealth Management, 2013)
It is evident that alternative investment when on their own have a possibility have having higher volatility than compared to traditional asset classes, specifically those of a fixed income. However, alternative investments have low correlations to more traditional asset classes which can be proven to be useful in economic slumps or for portfolio diversification (Blessings 2011). It is recommended that investors include some of the four alternative asset classes into their portfolio as it has a tendency of resulting in lower volatility overall which is evident in the graph below.
Figure 2- Standard Deviation and Diversification of Alt. Asset Classes (Source; Baird Private Wealth Management, 2013)
Investors can also take advantage of having a potential for higher long term performance than their traditional asset counterparts because they have a wider market in which to invest which includes both public and private but are known not to have similar investment constraints (Blessings 2011). This is evident with the graph below.
Figure 3- Returns on Alt. Asset Classes (Source; Baird Private Wealth Management, 2013)
There are risks involved with such investments including (Burton and Jacobsen 2001; Campbell 2005; Conovor et al. 2007; Eling and Marek 2011; Fassas 2012);
Therefore, it is recommended to mix the investor’s portfolio with both traditional and alternative asset classes to ensure soundness of the portfolio and use of investor funds. There are also four main deliberations that need to be taken into consideration before incorporating the four alternative asset classes into the portfolio.
Traditional asset classes such as stocks and bonds have dominated investment historically. However, alternative asset classes have rapidly become the choice of investment for many. Traditional asset classes such as stocks and bonds have been efficient for investment producing returns through investment strategy that has been predictable. According to Skidmore (2010) both institutional and individual investors have begun to explore alternative assets as a mean to increase returns and/or diversify risk. Since globalisation has had a huge impact on global economy, traditional assets such as stocks and bonds have become progressively linked. As seen in many cases, alternative assets’ performance is usually highly dependent on characteristics of the individual investment rather than being highly correlated to the market at large. In cases of precious metals, the asset class as a whole has the tendency of behaving very differently from stocks and bonds
There are various kinds of benefits that come from investing in alternative asset classes. In order to construct a sound portfolio it is essential to diversify investments so that if one type of investment is performing poorly another is doing well.
It is evident that alternative investments attempt to accomplish their returns by using unique investing strategies rather activity from the market to exploit market ineptitudes which the market has yet to identify. This results in an added layer of diversification that is able to complement more traditional asset classes. It should be noted that diversification alone can’t guarantee profit or ensure against loss. Furthermore, the unique properties of alternative assets mean that they come with a high degree of risk but also offer potentials for returns that may not be correlated with other markets. Aside from just investment value, alternative investments such as art/antiques, collectible cars, wines, and precious metals are a simple pleasure to own.
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