Diversification and the pursuit of better returns are just some of the reasons why investors might want to consider allocating to alternative asset classes, according to a group of senior analysts and strategists working in the alternatives space in Australia.
Martin Randall, senior investment analyst, alternatives at LGT Crestone, said that the reasons for investing in alternatives were “multifaceted” during a panel session at the Stockbrokers and Investment Advisers Association (SIAA) 2023 conference in Sydney this week.
“Diversification, absolutely. In constructing better risk adjusted return portfolios, you want to be able to diversify and have differentiated sources of return, but you’ve also just got broadly reducing risk and increasing return,” he explained.
“If you look at private equity, all of the data suggests that private equity consistently outperforms public equity equivalents over time. You’ve got 20, 30 years of data showing exactly that year on year.”
On the venture capital asset class, which he noted had grown substantially albeit with a major recalibration last year, Mr Randall said that this was the only way to invest in new businesses.
“That’s where the next Apples and the Amazons will come from. So when you look at optimising for enhanced returns, it’s very difficult to be able to achieve the returns that we’ve achieved in the past in public markets if you’re not investing in private markets,” he claimed.
“Private companies are staying private longer. The Apples and the Amazons aren’t listing after two or three years now, they’re taking 7, 8, 9, 10, 11 years.”
As an example, Mr Randall highlighted design software company Canva, which was founded in Perth in 2012 and still remains a private company 11 years later.
“The Amazon stories of the world, where you’ve achieved 2,000 per cent return since inception of the listing, it just doesn’t happen anymore. So there’s a big return driver as well as the diversification piece,” he said.
Blair Hannon, head of investment strategy at Global X ETFs Australia, pointed to alpha and differentiated returns as key reasons for investing in alternatives.
“Obviously equities struggle — certain equities, certainly not Nvidia — in inflationary environments, where something like gold or anything that’s bucketed in that CPI basket that is commodities focused will help you with that,” he stated.
Cameron Gleeson, the senior investment strategist at BetaShares, suggested that assets like private markets represented an opportunity to deliver outperformance, while other alternatives such as gold can act as a safe haven in certain situations.
“How you’re looking to defend your portfolio for particular market conditions is a little bit different to the sorts of alts where you’re trying to drive alpha,” he said.
“Different types of alternatives can provide different types of exposures. Some are about driving outperformance, others are about protecting yourself from scenarios.”
Thirty-one per cent of investors reduced their fixed income allocations in favour of alternatives in the prior nine months, and a further 29 per cent planned to do so in the next 12 months.
State Street also reported that the number of institutional investors seeking returns in alternatives had outnumbered those going to cash.
