In a market characterized by high asset prices, global political and economic uncertainty and low interest rates, SA asset managers are increasingly looking beyond traditional investments to include alternative investments in portfolios. of their wealthy clients.
South African investors are starting to follow the international experience. “Globally, alternative investments already represent an industry of 11 trillion dollars, which is expected to reach 17 trillion dollars (54%) by 2025 *. Interestingly, South African investors are picking up on this trend, rapidly increasing their allocations to the asset class. This is most prevalent among our wealth managers and high net worth clients, who are driven by the need to improve returns and reduce volatility in an increasingly uncertain world.
This is echoed by Matthew Norwood-Young, co-founder of Anchor Capital: “The national stock market is a difficult place to extract value. At the same time, global interest rates are at historic lows, making it difficult to hold large amounts of cash. This is where alternative investments can help, by delivering returns uncorrelated to the listed markets.
“The inclusion of alternatives in a portfolio also protects against panic or greed in investing behavior. We recommend them to more sophisticated clients and have seen excellent returns, such as the 7.2% annual return that can currently be achieved by investing in Westbrooke’s UK private debt fund compared to at least 2% pa which is currently achieved in comparative offshore. fixed income products.
Alternative investments include assets or investment strategies that do not fit into the traditional investment categories of stocks, bonds or cash. There is a wide range of alternative investments available, ranging from low risk strategies which often include private market forms of traditional investments, such as private debt and direct real estate, to riskier alternatives such as than venture capital.
Craig Gradidge, co-founder of Gradidge-Mahura Investments adds: “Although alternative investments are still in their infancy as an asset class in South Africa, there are particularly attractive pockets showing good returns. We prefer to deal with the largest product suppliers to better manage risk. As counseling becomes more professional and wealth managers become more comfortable with this asset class, we will see higher allocations. Currently, Gradidge-Mahura allocates around 5-10% for more sophisticated clients. There is certainly a need for training advisors and clients to further develop the sector.
Historically, investors in alternatives in South Africa have tended to include very high net worth institutions, family offices and investors, although there is a growing trend to make the asset class more widely available. Despite the low local adoption rates, the international experience has been very different. A 2020 report by UBS indicates that the past 30 years have seen steady growth and acceptance of alternative asset classes in client portfolios. For example, the average allocation to alternatives among a sample of 121 global family offices is 35%, with this ratio increasing to 75% in the case of specific investors, such as the Yale University endowment. .
The most popular alternative investments
According to a 2021 report by Prequel, the three largest classes of alternative investment are private equity, direct real estate and private debt. Family offices are the most invested in private equity, with a median allocation of around 20%.
Private debt is now the third largest alternative asset class in the world and has grown in popularity as investors intensified their search for alternative fixed income investments while global interest rates remained at record highs. Over the next five years, private debt is expected to grow at a compound annual growth rate of 11.4% per year.
Hedge funds should benefit in the future from the general shift towards funds managed more actively by investors.
Before investing, clients should consider that alternatives are typically unlisted, complex, and subject to lock-in periods where investors are unlikely to be able to access their capital. However, these same bottlenecks (which some see as a downside) can promote better long-term decision making by reducing the likelihood of the short-term panic behavior that is often created by short-term price movements in listed markets. .
In addition, the alternatives can be structured to be more tax-efficient for investors. The fees tend to be higher due to the complexity (alternatives are much more difficult for managers to implement than traditional assets), but investors are often rewarded with higher returns. These higher fees can be managed by increasing the prevalence of results-based fee structures, which typically align managers with performance. Finally, the alternatives generally have higher minimum investment sizes.
Well-known international alternative providers include Blackstone, KKR and Brookfield, but in South Africa Westbrooke Alternative Asset Management is the leading provider in several asset classes and geographies.
The need for improved returns, increased portfolio diversification and reduced volatility is a major driver of alternatives today. The bottom line is that the alternatives help reduce risk by generating returns that are uncorrelated to traditional investment markets. At Westbrooke, our goal is to leverage our highly experienced investment team, decades of experience and heritage as a shareholder and asset operator to provide our clients with an edge when they invest with us. , whether in private debt, hybrid capital, real estate and private equity. / venture capital in South Africa, the United Kingdom or the United States ,.
Dino Zuccollo is responsible for product development and distribution at Westbrooke Alternative Asset Management.
Online seminar: What are alternative assets and why should South African investors consider including them in their investment portfolios?
Moneyweb’s Ciaran Ryan and Dino Zuccollo will unbox that and more in this upcoming webinar. More info here.