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What alternative assets bring to your super investment mix

Most of us have heard of the main asset classes: shares, property, fixed interest and cash, but alternative assets are less well known. However, these types of assets can provide further diversification and enhanced returns for your super.

Alternative investments are those found outside the traditional asset classes. Typical ones include real estate, private equity, venture capital, infrastructure, renewable energy, hedge funds, commodities, and private debt.

Generally, these are assets that aren’t correlated to the performance of the sharemarket, that is they can often perform when sharemarket returns are down or flat.

The net result is that alternative investments add an extra layer of diversification – you’re not ‘putting all of your eggs in one basket’ and seeing all asset class suffer at the same time.

Low returns pique interest in alternatives

In the current low interest rate environment, which tends to mean lower returns for cash and bonds, alternative investments can help members grow their super to retire comfortably.

Alternative investments differ to publicly available funds as they’re part of the private investment market and aren’t easily accessible for individual investors. They typically include:

Infrastructure

Infrastructure assets are known for providing long-term, stable and predictable cash flows. Opportunities can be found within energy production and transmission but are also emerging in newer sectors such as agriculture infrastructure and renewable energy, particularly wind-powered energy and a selection of solar-power opportunities.

Private equity

The private equity sector invests in companies that are not publicly traded. The advantage is that by investing at the start of a company’s lifecycle, it’s possible to generate strong risk-adjusted returns and benefit from high earnings growth when compared to listed markets.

Real estate

Real estate has a low correlation to shares but is often considered to be a good hedge against inflation. The asset class has evolved over time to include publicly listed and real estate investment trusts (REITs) that include data centres, childcare and storage facilities, as well as commercial real estate debt, which provides loans to commercial borrowers who need funding for real estate purposes.

Performance can lift when using alternative assets because alternatives are generally less impacted by daily market movements in the way that other assets are. Shares and bonds can be quickly affected by changing market, social and economic events, such as the COVID-19 pandemic for example. Therefore, the overall volatility, or the ‘roller-coaster ride’ of increasing and decreasing valuations, should reduce when funds include a proportion of alternative assets in the mix.

Not all alternatives are equal

Of course, alternative assets need to be carefully researched and reviewed in order to find the most appropriate options for each particular fund. They need to be carefully weighed up against other asset classes and sectors to ensure the most appropriate levels of risk and reward that will support investors to achieve a comfortable retirement.

Source: IOOF

Consilium Private Wealth