Why invest in alternative assets?
Investing in alternative assets is more a necessity than luxury for almost any portfolio construction these days as asset owners and managers look for returns beyond capital markets.
This was the consensus of the speakers on the Examining Alternative Investment Opportunities panel of the Asian Investment Summit organised by AsianInvestor on May 26.
One of the strongest aspects of alternative investing is its ability to meet multiple core investment outcomes, said Christopher Hamilton, head of client solutions, Asia Pacific ex Japan, at Invesco.
“We think about growth, we think about income, we think about diversification. So, it's a very flexible asset class that can be leveraged in some of these environments we're experiencing right now,” he said.
Global events such as inflation-induced interest rate hikes and supply chain disruption affecting oil and commodities because of the war in Ukraine and China’s zero-Covid policy have caused market volatility in recent months, battering stocks and bonds.
Hamilton said investors, particularly in Asia, are ramping up their exposure to alternatives, such as private equity (PE), venture capital (VC), and real estate, to complement their traditional asset holdings and make up for the underinvestment in this sector.
Soon-to-be-introduced regulations in Hong Kong on risk-based capital for insurance companies are contributing to the industry’s uptick in alternative investing, said Richard Chan, chief investment officer and Asia head of ALM for AXA.
“Insurers in Hong Kong are moving into participating products with lower guaranteed returns to manage the capital requirement. To offer value to the participating policyholders, most of us move into institutional types of assets like alternatives that we can rely on our scale and with our long-term investment horizon, and where the policyholders usually cannot invest directly by themselves,” he said.
REAL ESTATE AN INFLATION HEDGE
Its mission to create positive social impact strongly influences AXA's investment strategy. Within the alternative space, it finds investments in real estate and infrastructure compatible with its mission.
“We try to fund projects directly that are transforming our economy or transforming the way how the world works,” Chan said.
Real estate is also an inflation hedge, especially in current times. “The rental income will also go up with inflation, the value will go with inflation, then it is already a good enough inflation hedge,” he said, adding that the same principle applies to infrastructure equities, particularly those closely linked to commodities, such as renewable energy.
Diversification underpins AXA’s investment strategy for the real estate sector. Chan favours commercial office assets as they are liquid and easy to sell. At the other end of the spectrum are assets such as life sciences centres, forestry, and data centres.
SELECTING THE RIGHT PE MANAGER
The past year has seen a significant inflow of liquidity into the private equity and credit markets, leading to concerns that the assets in this sector are too expensive relative to public markets.
However, SMU Endowment’s associate director for investment Kif Ho believed that it could be a case of the public markets having already discounted future cashflows. He believed that there are opportunities in the private market but investors must exercise care in their selections.
“Overall, if you invest in the right managers, especially in private equity, some of these guys are able to actually have that operational value-add to some of these companies,” he said, adding that this was a more sustainable investment approach than the “financial engineering” that certain PE companies engage in.
Australia Legal Super’s head of investment strategy Linda Trusler said the average super funds in the country are getting bigger due to the government’s policy to consolidate the industry, a move that has led to more direct deals between the funds and private companies.
Mezzanine credit - a hybrid debt issue subordinated to another debt issue from the same issuer – is the fastest-growing private credit asset in Australia as private financiers move into the space vacated by banks keen on deleveraging, she said.
AN ACTIVE MANAGED APPROACH TO COMMODITIES
Invesco’s Hamilton said that investors can use commodities such as energy assets, livestock, and precious and industrial metals as part of a broader allocation to alternatives, given the current concern about continued upside risks to inflation.
“Since the long-term volatility associated with commodities is high, along with a complex market structure, we prefer an actively managed approach utilised in conjunction with other real assets to enhance long-term risk-adjusted returns,” he said.
Agriculture is a significant alternative asset in Australia, said Legal Super’s Trusler. “It's got a good connotation to it because you could also link environmental, social and governance (ESG) and the social alpha that comes out of investing within agriculture,” she said, adding that Australian investors find affinity with the sector, given their experience with natural disasters such as bushfires and floods that have ravaged the country in recent years.
“There's a momentum behind these investments, and they are fairly resilient assets,” she said