Consultancy Project

Executive Summary

The aim of the consultancy project is to investigate four alternative asset classes to consider them 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, collectible 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 the university library, internet-based search, and search databases. The research also incorporated primary data with the help 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 viable investments with a 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 them through their portfolios to tap into the profitability of alternative asset classes.

Background

Even today, alternative investments are considered exotic investments 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 of 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 for investing: antiques and art, wines, collectable cars, and precious metals. Through this analysis, investors will understand the risks and profits obtained from investing in alternative asset classes that vary from the traditional stocks and bonds.

Objectives of consultation

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 “alternative assets”, which are 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 increasing globalisation, alternative assets have also come to include emerging global markets depending on their geographic regions.

Generally, alternative assets are highly dependent on innovative investing strategies or individual skills 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 particular properties of the piece of work to derive a value on the investment. According to Skidmore (2010), alternative assets lack correlation with other types of investment, which may help the investor increase or stabilise their portfolio return.

This consultancy project looks to analyse the chosen four alternative asset classes (i.e. arts/antiques, collectibles, cars, wines, and precious metals) as a choice for investment as opposed to other alternative asset classes as a means for investment to increase the price or value of the assets. In order to complete the consultation, it is necessary to develop objectives that will guide the consultancy process.

The objectives of this consultation include;

• Critically evaluate the traditional asset classes for their effectiveness in strategic asset allocation in the contemporary global business environment.
• Recognise the effectiveness and efficiency of alternative asset classes, antiques and arts, collectible cars, wines, and precious metals, from perspectives that focus on investment diversification and risk exposure.
• Comprehend the systematic risks and connection between the recommended alternative asset classes stated above as an investment choice for contemporary investors.

Overall, the current consultancy project aims to provide an opportunity for contemporary investors to gain access to the market’s rapidly emerging asset classes through the information and recommendations provided.

 Industry Background  

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 allows 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 collectables, 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 number of their financial assets in alternative investments to nine per cent (9%).

Historically speaking, private investors, mainly wealthy individuals, have placed capital in companies before the onset of the Industrial Revolution (WEF 2015). With the start of the mid to late 20th century, the current alternative investment industry began to take shape worldwide. Institutional investor interest in the alternative asset classes has grown significantly since the early 1990s (Masset and Wiesskopf 2010; Mochnacz 2013). Interest in 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 estimated $200 billion had flowed into alternative assets in 2005 alone. Furthermore, in 2006 a report suggested that alternative assets have accounted for a 10% to 20% share of institutional investment worldwide (Topintzi et al. 2007). The report also predicted that alternatives would make up an increasing share of new allocations by institutional investors, including high-net-worth individuals, corporate and public pension funds, foundations, and endowments (Fogarty 2007).

Consultancy Process

Research Methods

As proposed, the current project was conducted using the interpretive and inductive research approaches. The interpretivism approach allows researchers to interpret elements of the study, thus allowing human interest in the study. Based on this research philosophy, the position of meaning-making practices of human subjects is the focal point of the scientific explanation (Bevir et al. 2008). It is generally termed qualitative research and is conducted from an experience-near perspective. The researcher does not begin with concepts 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 natural methods, including interviewing, observation and analysis of the text. This is evident in the current project as the researchers used the methods of semi-structured questions posed to investment fund managers in the South East of England. The latter are knowledgeable of alternative asset classes, specifically wines, collectible cars, art/antiques, and precious metals as a viable investments. Using this philosophy, the researcher was able to ensure that adequate dialogue ensued between the researcher and the interviewees to construct a meaningful reality collaboratively. Angen (2000) asserted that evaluating research from an interpretive perspective means carefully considering and articulating the research question and having ethical and substantive validity.

Furthermore, the inductive research approach was essential to conducting the current consultancy project as it was 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 called the “bottom-up” approach as the researcher moves from observation, pattern, and 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 regarding the contemporary business environment. The strategy used to develop research methods was suitable for secondary data sources.

Sample Design

The semi-structured interviews were conducted using fifteen (n=15) participants who were investment fund managers. In order to choose the participants, a 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 capacity and willingness to participate in the research. Specifically, the type of purposive sampling technique used was expert sampling, as the current study needed to be enriched with knowledge that only individuals with specific expertise can provide. Participants were selected from the South East of England locality, including Berkshire, Buckinghamshire, East Sussex, Hampshire, Kent, Oxfordshire, Surrey, and West Sussex. A quick search on the internet provided a list of investment fund managers within these areas.

Once a comprehensive list was composed, participants were eliminated based on their expertise, and 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 an introduction of the researcher was made and the consultancy project and further through telephone. After which, fifteen investment fund managers agreed to provide the interview.

 Review of Secondary Data

Secondary data was obtained from the university library and through database searches on the internet and the university library database. Academic peer-reviewed literature was searched from databases 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 have been emerging recently as an investment choice for individual investors who are not considered institutional investors or HNWIs. Empirical data was also considered for this consultancy report, even though it is a qualitative research paper to understand the profitability and risks associated with these alternative investment choices compared to the traditional asset class.

Results of Consultancy

Alternative investments are commonly used to reduce overall investment risk through diversification. Often, 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);

• Low in correlation to stocks and bonds, the traditional financial investment options
• Are difficult to determine the current market value
• Are considered relatively liquid
• Relatively high cost of purchase and sale
• Limited historical risk and return data on asset
• Often may require a high degree of investment analysis before the actual purchase takes place

Based on a review of the literature and data acquired from investment fund managers, the four alternative asset classes could 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 follows;

1. Diversification: Generally, alternative investments have a low correlation to public stocks and bonds markets. This means that price movements in publicly traded stocks and bonds will usually not parallel alternative investments Hubbard and Waltz 2010. This provides the potential to develop a strong portfolio using alternative investments as diversifiers. It is evident and usually found that when a publicly traded investment is producing a trend of steady decline, there is a great possibility that the investment in an alternative asset class, particularly precious metals, may gain or hold a trend that is categorised as steady (Mamarbachi et al. n.d; Hubbard and Waltz 2010).
2. Higher return potential; the research found that alternative investments have the ability to balance investment returns within an individual’s portfolio (Worthington and Higgs 2004). Most investment fund managers have reiterated that it is common to find that when a traditional investment such as a stock or bond is underperforming, the alternative investment may be gaining or holding a steady position (Masset and Wiesskopf 2010).
3. Innovative investment strategies; it was found in the study that investment fund managers frequently use innovative strategies for an alternative investment to manage risk and pursue more significant returns, which are not commonly used in traditional investments (Hubbard and Waltz 2010). Some of the strategies that have been used for investment by the managers that had overlapped from data collected in interviews for wines, collectible cars, arts/antiques, and precious metals have been leverage, arbitrage, short selling, derivatives, and futures (Andrews and Benzing 2007).

It is reiterated that diversification does not always assure profit or loss. Instead, alternative investments cover a diverse range of categories, styles, and philosophies, which are different for each investment fund manager responsible for running them. Even though it was found that investment managers differed in their individual risk and return characteristics, they shared common characteristics that overlapped within the alternative asset class investments.

One of the most important aspects discovered is using alternative asset classes to spread risk. When diversifying into other asset classes, the investor can spread the risk as the more places in which an investment is placed, and there is 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 worth that is seen to be above and beyond their investment value. According to Blessings (2011), alternative asset classes perform exceptionally well 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, the asset class of precious metals and collectibles tend to increase in value and recommend that it is wise to invest 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 that many of the investing expenses can be deducted if they are itemised, allowing the investor to strain extra savings from 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 with alternative asset class investment in order to make more informed decisions towards the investment. Often, investors seek to operate in markets that are known to be complex, competitive, and global markets that vary in products and asset classes. This brings exposure to the uncertainty that is viewed as a risk and categorised into systematic or non-systematic risks. According to Blessings (2011), systematic risks are those which entail the challenges created by the unpredictability and volatility of the market. Andrews and Benzing (2007) state 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 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.

Table 1- Risk Review Framework for Four Alternative Asset Classes

In addition to the 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 identified as associated with the four assets found in literature and through interviewing investment fund managers (Blessings 2011).

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 point has been rated using a scale of 1-10, with 1= weak and 10= strong.

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 with such investment classes are real, but the associated risks can be mitigated using a realistic approach.