Why I really should be more alternative

The stellar returns from the so-called Magnificent Seven tech stocks (which include Apple, Amazon and the Facebook owner Meta) were a big draw for investors. But the sudden sell-off has been a reminder of how quickly markets can turn and how important it is to have diversifiers in your portfolio.
It’s all too easy to forget that there is more in the investment world than just publicly traded stocks and bonds. There is also the “alternatives” range of asset classes that includes property, infrastructure and commodities. The beauty of alternative assets is that they deliver different returns than traditional holdings — and often a stable income that can be drawn on or reinvested to boost total returns.
Infrastructure and real estate have looked favourable since the base rate cut from the Bank of England in August, lower inflation and signs of some green shoots of economic recovery. Low valuations make them attractive, as do the income they generate and their defensive qualities in volatile markets.
Infrastructure is a unique asset class. It’s a form of real estate where your money backs projects such as bridges, road, highways and energy. Much of the return comes from regular dividends, which will please income-seekers.
When it comes to investing in property (other than your own home), commercial property such as warehouses, depots, offices and shopping centres can give access to rental income streams. The shift to online shopping has hit properties in town and city retail areas, but does means there is now strong demand for warehouses and depots.
Commodities are a different beast and include oil, gold and other precious and industrial metals, and agriculture. Typically they are highly sensitive to the economic cycle because when global GDP growth picks up, this drives demand for the materials required for manufactured goods and construction, and for the energy to power factories.
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Jason Hollands from the wealth manager Evelyn Partners said that investors may be surprised to hear, given the global push towards net zero, that the outlook for energy companies isn’t as gloomy as you might expect (in the medium term). Since the Paris agreement to tackle global warming, energy companies have become much more disciplined about spending on new infrastructure and more focused on maximising profits. Plus energy shares are very cheap.
James Klempster from the investment firm Liontrust Asset Management said that alternatives such as property, infrastructure and commodity investments, while occasionally disappointing over the short run, have a long and deep history of rewarding patient investors either through outright returns or through better constructed portfolios.
When it comes to investing in alternatives you don’t need to back every asset on the list.
If infrastructure takes your fancy, there are two main ways to invest: through the shares of listed infrastructure investment companies that have direct exposure to operational projects, or by choosing the shares of publicly listed companies that are involved in infrastructure, such as utilities firms.
My own pensions and Isas are crammed with nothing but pure equities. Not a bond or diversifier in sight, which means that I live with higher volatility. But a fund recently flagged to me by Jake Moeller at the investment research firm Square Mile has piqued my interest. FTF ClearBridge Global Infrastructure backs companies in the infrastructure sector. All its holdings are real assets, available for public use and operating within a regulated framework. These tend to be related to water and wastewater, gas and electricity transmission, and firms with “user pays” services such as airports, toll roads and ports. It’s comforting that the managers have a bias to the largest and most liquid infrastructure companies. The fund has returned 37.7 per cent over five years.
For something a little different, there’s the VT Gravis Digital Infrastructure Income fund. It invests in Real Estate Investment Trust (Reits) that own data centres, telecoms towers, networks and logistics. Managers at Gravis describe digitalisation as the fourth industrial revolution. This fund has lost 5.2 per cent over three years, but returned 10.6 per cent in the past year.
For real estate, the VT Gravis UK Listed Property fund (from the same house) invests in UK Reits and follows four big trends of “next generation property”. These are: the ageing population (investing in GP surgeries, care homes), generation rent (student accommodation), urbanisation (logistics, warehouses) and digitalisation (data centres). The fund is liquid since it doesn’t invest in physical property, and so is a solid way of investing in this area without the risk of a property fund being closed to withdrawals while managers have to sell property to meet redemptions. The fund has lost 20 per cent over three years, but returned 17.8 per cent in the past year.
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Moeller also suggested the Schroder Global Cities Real Estate fund, which mostly invests in real estate investment trusts. Its managers look for property investments that can help to provide solutions to global social and environmental challenges. The fund has returned 7.2 per cent over five years.
If you want to back commodities as a long-term commitment, the Guinness Global Energy is a popular specialist fund. As well as the big oil and gas names you would expect to see, it holds some of the picks-and-shovels stocks such as oil and gas exploration companies and firms that provide equipment and services to the energy sector. The fund has returned 33.4 per cent over five years.
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Collectibles are often lumped into the alternatives sphere. These include anything from cars, art and stamps to Beanie Babies and pop memorabilia. But, as Klempster highlights, there is no income to anchor to or means to judge future value. Without income, the value of something rests solely on what other people deem it to be worth, which can make it risky.
So while you might like to count your signed Oasis T-shirt as part of your overall wealth, it is perhaps unlikely to fund your retirement.
When it comes to how much of your portfolio should be in alternatives, it’s up to you — within a sensible range. Advisers at Evelyn Partners say that allocations to alternatives in managed portfolios range from 4 per cent to about 21 per cent.
It’s important not to go overboard because anything above that would eat into your traditional market exposure, but its seems like I should probably take a look at these diversifiers in my next portfolio review.Holly Mead is away