Winds of change
The alternatives sector has evolved significantly over the past decade. Before the global financial crisis, it was dominated by hedge funds and private equity funds. However, over the past few years the UK-listed Investment Trust sector is democratising private markets by allowing individuals to purchase shares in some of these more illiquid markets.
Today, investors can own a stake in a wind or solar farm that costs tens of millions of pounds to build and gives investors access to stable, repeatable cash flows that are paid out in dividends. In addition, having alternatives through a listed investment trust offers diversification benefits to what would have historically been an equity/bond-dominated investment portfolio, without affecting the manager’s daily operations when you want to add or decrease your holding.
The investment trust universe allows investors to gain access to a wide degree of assets that would typically only be accessible to investors with large amounts of wealth. One can invest with as little as the cost of one share at one to two pounds. So, even if you only have savings of £1,000, we believe investors could easily have a 10 per cent or 20 per cent allocation to alternatives.
Investors can also invest in a well-diversified multi-asset fund that has a meaningful allocation to alternatives and outsource the decision-making on which alternatives to own and when to rotate between different assets and asset classes to the fund manager.
This can provide a wider degree of diversification within alternatives, between stable compounding ideas and more growth orientated ideas, as well as providing exposure to emerging asset classes more quickly, such as music royalties or digital infrastructure. It allows for a core diversified portfolio where you can add on some other equity or bond exposures depending on an individual’s own views and risk tolerances.
Alternatives are not risk-free, but their risk profile is well compensated given the strong contractual nature, inflation-linked revenues and limited economic sensitivity of their revenues that help provide the stable cash flows they are known for. For that reason, we believe they provide an attractive compliment to an investor’s portfolio.
Paul Flood is portfolio manager of the BNY Mellon Multi-Asset Income Fund
