Should you consider investing in alternative assets?
JP Morgan recently released some data around alternative assets. Alternatives, generally include investments such property, infrastructure funds, private equity, and hedge funds. JP Morgan argue that allocating 20% of a typical balanced portfolio to alternatives, there is the potential to increase the annual return of the portfolio by approximately 1% per annum. In a world of lower investment returns, this looks interesting. There are, however, a number of caveats to consider before you decide to look more closely at this investment strategy. For example, here are three questions you should ask your financial planner:
1)Will the extra investment returns be eaten up by fees? Typically, alternative assets have higher fees than more ‘traditional’ asset classes, such as equities (shares) and government bonds.
2)By including alternatives assets in my portfolio; will they help smooth the investment journey by lowering the volatility of the portfolio?
3) Will alternative assets add value over the long-term?
Question three may be answered by data from the US. A number of high profile universities, such as Harvard and Princeton, have increased their exposure to alternative assets over the last few decades. Ben Carlson, a Director of Institutional Asset Management at Ritholtz Wealth Management, has found that these strategies have failed to do better that a simple balanced fund, consisting of 60% equities/40% Government Bonds (see table below). In other words, the added complexity and cost of alternative assets did not add value. We believe that over the long-term you will have a better investment experience by keeping things simple.
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