Getting clients to engage in their financial future is a battle faced by all financial advisers.
Many clients are, quite simply, bored by their own financial affairs. Neither of the traditional asset classes – bonds and equities - makes for a particularly compelling story at the moment.
Bonds are staid and well-valued. Equities are volatile and few enjoy the ´seat of the pants´ ride they currently provide.
The lure of alternatives is that they provide answers to both these problems. It is far easier for a client to see the value in spending his money on wine or classic cars than on the intangible delights of bonds or equities.
Alternatives can also provide the investing nirvana of uncorrelated income and capital growth. So, glamorous, exciting, uncorrelated, but are they any good?
And if they are not, where else should investors be looking to diversify their portfolios?
Looking outside traditional financial products and into the realm of alternatives offers two important advantages – finite supply and flexibility.
As Joss Fowler of the fine wine department of Berry Bros & Rudd points out, there will never be any more 1996 Bordeaux made. If demand goes up, it is translated directly into prices. Equally, this type of investment is tangible.
If you can’t sell it, you can always drive it or drink it. It is much easier for clients to see the value.
The major argument against is liquidity. Prices can usually be benchmarked but there is no ´market price´ at which investors know they can sell. For many of these types of investment, an investor will be relying on the caprices of collectors or the tastes of critics to be able to sell his investment on again.
The wine market, for example, is dominated by Robert Parker, whose rating out of 100 can make or break a wine’s market value.
Of course, this can work in favour of alternatives. At a time of expanding global wealth more and more people relish the kudos of a good wine cellar filled with classic Bordeaux.
Ian Goldbart, managing director of Noble Investments, adviser to the Avarae Global Coin fund, says coin investments can see a similar correlation.
As a country’s wealth increases, people are more inclined to buy back their heritage, which can boost prices for rare coins.
There is an argument that investing, particularly pension investing, should be long-term. Investors therefore should not overpay for liquidity they don’t need. If they have the time to find the right buyer and weather the vagaries of the market, liquidity should not be at the forefront of their mind. Fowler points out that wine can often take 20-30 years to mature.
There is money to be made. Fowler says: "This is a very interesting time. There has been an explosion in global wealth. We have seen some moves in the fine wine market that we have never seen before."
He points to a 1996 Chateau Lafite, selling a year ago for 2,400 a case, which is now fetching 4,500 a case. The same is true for classic cars, as Aston Martin DB4GT has nearly doubled in price over the past 4 years. Equally, the entry level is not prohibitively high with wine starting at around 10,000, classic cars at 4,000. The coin fund trades on the stock exchange.
Goldbart says: "Coins have generally returned 10-12% per year over the long-term. Investors should be holding for at least 3-5 years."
Returns from this type of investment can be lumpy and unpredictable and investors have little recourse if things go wrong. Equity and bond investment is swathed in information – key features documents, manager reports, daily pricing.
None of these alternative investments has that certainty. It is even more important to pick an adviser with care and to be aware that investors are, to some extent, at their mercy.
No matter how much someone fancies themselves a wine buff, they are unlikely to be able to match the knowledge of someone who does it day to day.
The middle ground is in alternative financial products, such as hedge funds or global property. These may not inspire in the same way as wine or cars, but they can provide diversification for a client’s portfolio.
Magnus Olsson, head of funds at London & Capital, says: Hedge funds are a good diversifier within a portfolio and investors should consider an allocation of 20-25%.
The advantage is that the losses are limited. At worst hedge funds will tend to be flat." He believes investors should always hold a portfolio of 20-25 different strategy hedge funds because the performance of different hedge fund types varies year to year.
Simon Hopkins, chief executive of Fortune Asset Management, uses four criteria for the selection of hedge funds. He says: One, you need to know what the investment is. Two, liquidity is essential. Three, capacity is vital, you need to be able to commit further assets. And four, there needs to be fair pricing."
He believes that hedge funds are a good thing to be looking at now as equity markets have been strong for sometime.
Global property investment can also provide income and capital gains only loosely correlated to the equity and bond markets.
Iain Keys, director of Real Estate at London & Capital says: "A lot of money is still going into UK property because of poor performance in bonds and volatility in equities."
He says that the German property market currently looks like a good investment, offering good yields and low borrowing costs.
There is a wealth of alternatives out there and diversifying an investment portfolio away from bonds and equities can be no bad thing.
However, the risks are greater in these asset classes and dealing with reputable companies and advisers is a must. They remain one for the bolder investor.