Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Investing ain’t what used to be. New technologies and vehicles offering investors simple access to complex investments have inspired a generation to find alternative ways to invest their money.
Take cryptocurrencies. Volatile, techy, and with more than a hint of “get-rich-quick” about many of them, cryptocurrencies chime particularly with a new wave of investor. Around 2.3 million UK adults are now believed to hold some form of cryptocurrency, according to the Financial Conduct Authority.
Some cryptos are nothing more than pure speculation. Dogecoin, for instance, was created seven years ago as a joke: today it’s the sixth largest cryptocurrency by market cap.
But some have more substantive appeal. Take Bitcoin, the most well-known of all cryptos and the largest by market cap. Its role in an average portfolio is still hard to pinpoint, owing to its extreme volatility and the murky intentions behind its creation. It’s stark environmental impact is also of real concern, and it’s likely regulators will eventually clamp down on how it’s sold to private investors.
There is a case to be made, however, for Bitcoin to be used as a store of value akin to gold.
Bitcoin benefits from the great advantage of finite supply – only 21 million bitcoins will ever exist. Even gold, whose supply is severely limited, can’t beat that. Bitcoin is also beyond the control of governments and central banks, meaning its price cannot be manipulated by governing institutions seeking a particular exchange rate.
It’s not there just yet, but Bitcoin is gaining wider appeal as a credible alternative to the traditional asset classes.
And it’s not just cryptocurrencies that are catching investors’ eyes. One fast-growing corner of the asset management universe is private capital. Hitherto the preserve of large institutions or a very select list of high-net-worth clients, investing in private capital used to entail less liquid and opaque investment strategies that nonetheless offered the prospect of better returns than stock markets.
Now, private equity is far more widely accessible though simple and familiar investment vehicles. Private equity Exchange Traded Funds (ETFs), for instance, invest in publicly traded private equity companies - that is to say, they function as funds of funds, granting private investors easy and liquid access to private companies.
Investment trusts also offer access to private equity through their unique company structure. Trust managers can afford to invest early in unlisted companies and hold them for a long time without worrying about liquidity demands.
New assets and familiar vehicles offer private investors the opportunity to invest in alternative assets which were previously beyond their reach. But it’s not just risky or complex assets such as Bitcoin that are gaining popularity. There’s also been a rise in interest for traditional alternatives that make more sense in an uncertain economic environment.
To understand that rise, it helps to see that there has always been a case for diversifying your portfolio through alternative asset classes like property and commodities. Different assets should, in theory, move in different directions. By holding several, you help keep some parts of your portfolio firing when others falter.
In recent years, however, investing through the traditional 60/40 split between equities and bonds has generally sufficed - the larger equity split for growth, the smaller bond allocation for stability.
Nor was it particularly difficult to know where to invest. The most successful long-term equity strategy of recent years has been to stick your money in the US. Investors have gotten comfortable seeing their portfolios rise in tune with the longest bull market in history.
Things have become a little trickier since the pandemic struck. Bonds now offer rock-bottom income levels, with low interest rates set to last. A rise in inflation would change that, but that too would spell bad news for bonds - inflation threatens to devalue the level of fixed interest you earn on your bond.
A search for income and ways to hedge against inflation have seen investors turn back to alternative assets. Some of these assets are captured in the “alternatives” class of funds on our Select 50 list of favourite investments.
One asset class which can tick both boxes is infrastructure. Mark Brennan, manager of the FP Foresight UK Infrastructure Income fund, a Select 50 choice, recently explained how infrastructure assets often have their cash flows tied to inflation to Fidelity investment director, Tom Stevenson. You can watch that interview here.
Other assets also make sense in these peculiar times. Gold is a popular hedge against inflation, given its role as a store of value, and that the opportunity cost of holding the zero-income shiny metal is minimal in a low rate environment. For a Select 50 option, there’s the Ninety One Global Gold fund. This fund invests in a diverse portfolio of gold mining companies worldwide while also having the flexibility to buy physical gold ETFs and shares in companies that mine for other precious metals.
Then there’s property. Commercial property took a bit of a battering over the pandemic, but the long-term case for holding a portion of your portfolio here is still intact. As a passive tracker fund, the Select 50 iShares Global Property Securities Equity Index Fund is a good option for investors looking for a well-diversified, global property portfolio.
Allocating a small portion of your portfolio to alternative assets can be a sensible move, regardless of the prevailing market conditions. Whether you look to diversify into new and exciting assets, or prefer to keep things more traditional, is up to you.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to sell/cash in this investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer's opinion rather than fact. Select 50 is not a personal recommendation to buy or sell a fund. The iShares Global Property Securities Equity Index Fund and the Ninety One Global Gold fund invest in overseas markets and so the value of investments can be affected by changes in currency exchange rates. The Ninety One Global Gold fund invests in emerging markets which can be more volatile than other more developed markets. The iShares Global Property Securities Equity Index Fund invests directly in property, which can be difficult to sell and the value is generally a matter of opinion rather than fact. The Ninety One Global Gold fund and the FP Foresight UK Infrastructure Income fund use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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