It is hardly surprising that many investors are sitting on large piles of cash at the present time; fearful of the volatility that defines the performance of global equity markets – the kind of volatility that can severely dent portfolio value overnight based on the latest piece of political rhetoric or economic data. Against this unpredictable backdrop, Investor sentiment is at an all-time low, and many are seeking out alternative investment assets that offer a degree of capital security and income in exchange for the illiquidity that is inherent to real assets. Certainly, most investors see more value now than ever in owning something tangible that they can see and touch.
But where does one choose to invest their capital in order to improve portfolio performance and add meaningful risk reduction through diversification? Here are 3 homes for investment capital that have outperformed traditional investment assets in the long-term – and which carry a lower risk profile than traditional equity investments:
1. Strategic Property Investment
Investments in property and land assets have long been considered a mainstay of the portfolios of the wealthy. Well located property assets can generate income to trounce that of share dividends, and property values always tend to increase given enough time, even if buying at a peak and selling in a dip.
In the current market, opportunities exist for cash-rich investors to participate in what is ostensibly a transfer of wealth, as debt-laden distressed sellers seeking immediate liquidity and are prepared to sell their assets at knock-down prices. This provides the investors prepared to take on the ownership of such assets with two opportunities for profit. For the short term investors simply seeking a quick profit, these assets can often be improved with a small amount of remedial work and then sold on the open market. This allows the investor to capture the purchase discount as an instant liquid capital gain, and furthermore the original capital (and profits) can be used over and over again in order to make further acquisitions.
For the Investors seeking income, buying properties at a substantial discount enhance rental yields, and in many markets investors are consistently acheioving annual nets yields after costs and taxes of 10% – far better than the 4% offered by banks and building societies.
There are of course a number of risks attached to both forms of property investing, not least the aforementioned illiquidity, as well as risks assigned to the individual assets, counterparties, local markets and on-going management and maintenance. But nevertheless, well-located and well-maintained property assets will continue to provide income and profit opportunities for investors prepared to think a little outside the box and who have access to a capable partner able to source and manage deals.
2. Forestry Investment
This unique asset class provide three levels of growth for the investors, and is underscored by undeniable trends in basic socio-demographic fundamentals including population growth and economic and social advancement in the developing world. As demand for timber for paper products, construction and fuel continues to rise in line with growth in the global population, timber prices tend to increase, especially as supply from natural forests is very much depleted and the introduction of environmental legislation protects natural forests from further deforestation.
Furthermore, (and this is the primary driver of financial returns from forestry investment), timber grows in physical size, giving owners of sustainable timber plantations exposure to financial growth that is completely separated from the performance of financial markets. Finally, as timber is situated of agricultural land, investors also benefit from land price appreciation.
As with property investments, forestry investment also carry risks associated with the asset itself (quality of the land/trees), counterparty (quality of the management), sector (general agricultural risks such as disease or flooding), and location (the best and fastest growing timber is often located in emerging market economies which offer less political stability. As with any investment, interested parties should seek advice from a consultant with a track record of identifying and delivering successful investment projects within the sector. It is also worth noting that by it very nature, forestry investments are long term plays which require enough elapsed time in order to allow trees to flourish into valuable timber stands – which will require regular inputs of cash and expertise in order to manage, maintain and maximise growth and income.
3. Farmland Investments
Another long term investment, farmland values are supported by the income generated from the underlying asset, making this asset class a interesting play both for the growth investor and those seeking investments for income. Land produces food, and food sells for a higher price when demand is high and supply limited. As the global population continues to race toward 9 billion people, and the supply of good quality agricultural land continues to be impacted by urbanisation and climate change, the prices of food is likely to increase, and so too therefore the value of productive land.
Another driver of demand for food is the change in diets in emerging market economies. As these populations become wealthier, they demand a more protein rich diet – consuming much more resource intensive meat which adds further pressure to demand as each person consumes more calories -a s well as there being more people overall.
This makes farmland an attractive asset class for the investor seeking capital preservation, and inflation hedge, and the possibility to capture a decent income from rental or farming operations. Indeed, many pension funds and other large long term investors are buying up agricultural land in order to align the performance of their portfolios with trends in population growth and economic growth in emerging economies.
As always, seek advice from an experienced professional with a track record of sourcing and delivering alternative investments that have performed well.