SprottWealth Insights

Where the "smart money" is going (and why)

Tuesday, February 28, 2017

The new Trump Administration, impending Brexit negotiations, and a slew of geopolitical events continue to drive considerable market volatility. Yet, while key US indices are near record highs (in late February), the “smart money,” is increasingly skeptical.

Pension funds, family offices and other long-term investors, continue to steadily increase weightings in alternative investments. Their goal is to provide more stable growth by focusing on overall outcomes, rather than specific investments.

Alternative investments include holdings that have low correlation to stocks, bonds and other traditional asset classes. Examples include private equity, hedge funds, real estate and commodities. In early 2014, PWC projected that allocations to alternative asset classes would grow by 9.3% a year until 2020, to reach $13 trillion USD in 20201.

Growth in the alternative investing space

There are clear signs of the growing popularity of alternative asset classes. According to the Preqin H2 2017 investor outlook2, more than one-third of institutional investors had exposure to at least four alternative asset classes at the start of the year. That’s a huge 8 percentage point jump from last year. Survey respondents were most bullish about private debt, private equity and natural resource investments.

Several key factors are driving the increased popularity of alternative asset classes. Among them are:

A desire for volatility protection

Canadian investors, whose average age is climbing, are increasingly opting for steadier returns, as opposed to overall performance. The current geopolitical and economic environment, characterized by sovereign risk, wild currency gyrations and increasing threats to America’s global military hegemony, make that stability ever harder to achieve.

Diversification

Increasingly interconnected markets mean that traditional asset classes and geographic diversification no longer provide the downside protection investors demand. Alternative investments, which utilize tools such as hedging, long-short and other strategies, offer sophisticated ways to help mitigate the increased risk.

Uncorrelated asset classes

Central bank policies are causing stocks and bonds to trend in the same direction more and more, across industries and often, even across countries. Alternative investments provide investors with downside protection through uncorrelated asset classes.

Interestingly, the Preqin data show that while those with exposure to alternative investments are expanding and diversifying that exposure, the proportion of investors that have no holdings in the category has remained relatively constant. The average investor, it seems, has not caught on to the benefits of alternative investing.

Partnering with an investment advisor

Alternative investing was typically best suited for institutional and high-net worth investors. However, alternative investment opportunities are increasingly being made available to the retail investor and should certainly be explored with your financial advisor.

The best tool to find out about alternative asset classes is a seasoned investment professional. Your investment advisor will present options based on your risk and volatility tolerance, time horizon, relative preferences for income, growth, and the weightings to assign to individual components.

Conclusion

Despite recent uncertainty, there are positive signals for the broader overall economy. The Trump administration has proposed tax cuts, deregulation initiatives and infrastructure spending. Small business optimism has spiked. Here in Canada, employment growth continues to be strong. The question is whether, and to what degree these trends will play out. 

Right now the “smart money” isn’t sure, and is thus increasingly hedging its bets through alternative investing.

To learn more about how alternative investments strategies, can strengthen your portfolio, please contact your SprottWealth advisor.

1 http://www.pwc.com/gx/en/asset-management/publications/pdfs/pwc-asset-management-2020-a-brave-new-world-final.pdf
2 https://www.preqin.com/docs/press/Investors-H1-17.pdf