The growing allure of alternative investments

Alternatives JPMAM diversification illiquid assets

13 November 2023
| By Rhea Nath |
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With macroeconomic conditions putting traditional asset allocations to the test, there has been growing interest in alternative assets as a diversifier and inflationary hedge. 

In its 2024 Long-Term Capital Market Assumptions, J.P. Morgan Asset Management (JPMAM) said alternatives continue to offer “powerful tools” supporting portfolio diversification, inflation hedging and resilient performance. 
Real assets, it said, could deliver resilient returns, inflation sensitivity and diversification over a 10–15 year investment horizon.

JPMAM observed that its 2024 long-term return projections for a traditional portfolio, once the mainstay of investors allocating 60 per cent to stocks and 40 per cent to fixed income, experienced a slight decline compared to its 2023 forecast. 

Instead, in keeping with market conditions, investors were diversifying into other asset classes with different weights for lesser volatility and more durability along the cycle. 

It stated: “We expect to see investments in alternatives play a more significant role in portfolio allocations by providing potentially attractive returns and diversification benefits.”

According to William Morgan, portfolio manager at Atrium Investment Management, the last few months have demonstrated that holding alternatives as part of the portfolio can “really deliver” for investors. 

He noted the 60/40 portfolio relies on the negative correlation of equities and bonds, whereas that correlation has been inverted in many ways through 2022 and part of 2023.

“Alternatives have been a crucial balance to our overall portfolios, so our volatility is substantially lower. Now, that can be frustrating in a bull market where everything’s rallied, but it’s incredibly comforting and critical through much more turbulent times,” he told Money Management.

Against the backdrop of interest rate hikes globally this year, however, liquidity appears to be harder to come by, he added, which can affect allocations to the private market.

“The movement in interest rates has, in many ways, shocked the markets as it dried up liquidity whereas previously, there was a massive supply of capital. You see that in transaction levels across the industry, that’s both liquid and illiquid markets. M&A and IP activity has been very lean all year, transaction volumes in both private debt and equity have been very low. 

“It’s not really a function of economic conditions; it’s [that] people are trying to figure out where valuations are going to land.”

Limitations on access 

The positive sentiment towards alternatives has also been echoed by data coming in from UBS Asset Management, which indicated a 300 per cent increase globally in allocations to alternatives over the next five years. 

Presently, though, the asset class has yet to be democratised for a wider audience, said Alison Telfer, country head Australasia at UBS, given liquidity, complexity and access due to its high minimum investment requirements (typically starting at $100,000) that make it unsuitable to most retail investors.  

“It’s definitely the realm still of the higher balance accounts and the investors that are able to work with advisers that get them that institutional grade,” she told audience members at the Australian Financial Review Super & Wealth Summit this month.

“[Allocations to alternatives are] coming, as we’ve all been saying. That move in liquidity to monthly and quarterly is really going to open those pipes up, so is education and awareness around the importance of these [assets].”

Reflecting on the firm’s own experience in private markets, Atrium’s Morgan noted that attractive valuation points play a key role towards transactions, particularly when it comes to locking up capital for long-time horizons. 

This was one of the reasons the asset class might not be suited for the average retail investor. 

“With private markets, because we’re allocating our capital for a long period of time, the entry point is really critical, so when you think about an equity investment in private markets, whether you’re buying a building or an agricultural investment, you’re looking at fundamental valuation from the perspective of the cash flow that’s going to be generated from it – and the potential capital growth that you can anticipate from that asset,” he shared.

Hunting for offerings

While they may not typically be used by retail investors, nevertheless institutional investors globally have been increasing their allocations, and two niche funds investing in marina property and dairy production are among the beneficiaries.

Julian Biggins, co-chief executive at MA Financial, said institutional allocations to alternatives have risen from some 5 per cent in 2000 to 30 per cent in 2021.

“By some forecasts, this will increase to 60 per cent by 2030 and push the size of the global industry to $23.2 trillion by 2026,” he told Money Management.

MA Financial manages an MA Marina fund, which provides exposure to Australia’s marina industry via a diversified portfolio of around 12 assets located across the east coast in NSW, Queensland and Victoria, and said there has been significant interest from domestic and international investors keen for exposure to defensive, cash-generative assets.

Launched in April 2023, the MA Marina Fund is open to wholesale investors with a minimum initial investment of $100,000.

Since launching, the fund has raised over $166 million and targets a distribution yield to investors in excess of 7 per cent per annum and growing and a total return above 13 per cent. 

“Alternative real assets, such as marinas and hotels, offer an extra dimension of diversification to an investment portfolio. This is because their returns are tied directly to the earnings generated by the business they operate, while also retaining ownership of the underlying real estate,” Biggins explained.

“They are defensive, cash-generative businesses with the majority of revenue coming from boat storage, property rental and boat maintenance, which are of a recurring nature.”

There is potential for further upside in the future for the fund from investments in value-add projects and additional acquisitions, Biggins added.

He said: “Well-located marinas are very difficult to build due to planning restrictions, and there is an increasing demand as more larger boats arrive in the country. The demand and supply fundamentals are very much in favour of marina owners.”

Kirsti Keightley, dairy investments general manager at Prime Value Asset Management, also highlighted the appeal of income with capital growth in its Dairy Trusts vehicle, which offers diversified exposure to 10 dairy farms and three support farms in southwest Victoria and northwest Tasmania.

Presently, it aims to deliver stable income from milk sales with the potential for capital growth through farmland appreciation and through development work on the farms. It commenced in December 2019 and aims to close in the first quarter of 2024 on the trajectory to some $200 million. 

“Like all property you buy, we have capital growth, and if you look at the appreciation of land in  southwest Victoria and northwest Tasmania in the last 20 years, it’s been running around 7 to 8 per cent. So, for the lifetime of our fund, we’re talking 12 per cent return; there’s a distribution of 5 to 7 per cent and capital growth,” she explained.

Keightley highlighted value-add opportunities lie in not just dairy production, but the potential for dairy beef and in water assets, which have not been valued yet as part of the portfolio for investors. 

“If you’re living in, say, Sydney or Melbourne, and you like the look of agriculture as an investment, it’s very difficult to go out and buy a farm and run it if you don’t know what you’re doing. A lot of people had relatives, grandparents, or family who were farmers and would like to be involved, and what we’re doing is giving you the opportunity to be involved in agriculture but you don’t have to run it,” Keightley said.

“[With regards to] investing in shares and other things, this is food we’re producing; people always want to eat and they’re always going to buy dairy.”

She suggested the fund is able to produce consistent and competitive risk-adjusted returns due to numerous factors working in its favor. 

“COVID had no absolutely no effect on how much product we sold; there was actually an upside in demand and it’s increasing worldwide. You’re [also] seeing the Asian market change the way they’re eating and moving towards a more Western diet, eating smoothies or pizzas, so you’ve got a massive potential to export as well,” she said.

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