Investment Articles

What Are Alternative Investments?

As stock markets continue to falter across the globe, worries of a default on sovereign debt in Europe continue to mount, and inflation continues to erode the real value of savings, investors are considering alternatives to traditional assets such as stocks, bonds and cash. But just what are alternative investments, who is investing in them, and what are the risks involved?

Traditional Investments

Traditional investments are considered to be equities (shares), cash, bonds and property. Most investment portfolios are made up of a combination of these kind of assets, and financial advisors are trained to advise investors on the relevance of these kind of investments based upon their own specific set of circumstances. Investors have long invested in stocks for growth and income, bonds for income, and cash of income in the hope of building their wealth faster than the rate of inflation in order to provide for retirement or other life events such as school fees or maybe a house move.

Alternative Investments

An alternative investment can be any transaction entered into with the ultimate aim of generating capital growth in the value of the underlying asset, or regular income, that is not a traditional investment asset as detailed in the section above.

These kinds of assets have been very popular with institutional investors who want to diversify their portfolios and capture profit that is generated outside of the traditional markets. Some examples of investment alternatives are precious metals such as gold, art, fine wine, collectibles, farmland and forestry investments.

Alternative investments behave differently to traditional assets because capital growth is usually derived from an increasing demand and a finite supply, such is the case with gold, farmland, fine wine and art. The greater the demand, the higher the price and more profit for the investor. Income from alternative investments is not usually in the form of a dividend as with shares, but can be rental income from a property, or the sale of commodities produced by the asset such as crops from farmland or timber from forestry. This makes alternative investments popular because neither income nor capital growth is dependent upon the performance of stock markets or other traditional markets forces. This means that investors can turn profits, even in a downturn market.

Who is Investing in Alternatives

Large investors such as pension funds, hedge funds, family offices and high net worth individuals have been investing in alternatives for many years, in many cases generating excellent returns beating traditional markets by some margin. These investors are experts and understand the assets they are buying and how to value, manage and ultimately dispose of them effectively and profitably. Investing in art, for example, requires an extremely high level of expertise and knowledge to invest successfully.

Recently, institutional investors have started to buy more and more farmland and forests, as demand for all of commodities that farmland produces on annual basis such as food, animal feed and fuel, is growing in line with our expanding population. We simply require more and more of these commodities each year but we have very little farmland left that isn’t already in production. It is this increasing demand and limited supply that pushes up prices in the long-term, and the same can be said for forestry investment’s as humankind requires more and more timber to build and maintain our homes and cities, yet there is very little natural forest left to harvest so we must rely of commercially grown timber which takes many years to mature. Again, increasing demand and limited supply push up prices, creating profit for the owners of the assets.

Many analysts reporting on alternative investments such as Barclays Capital have indicated that by 2015, almost 5%, or $1 trillion in institutional investment capital will be invested in farmland and associated commodities.

David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.

Download the alternative investment report and view investment opportunities at: http://www.dgcassetmanagement.com.

As the investment climate continues to dictate poor returns on cash, volatile equities and high inflation, investors are turning to alternative investment assets in an attempt to sure up portfolios, replace languishing income streams and rebuild capital growth, whilst at the same time looking for growth that is driven by fundamental changes in the shape and size of the global population and economy.

Many investing legends such as Jim Rogers and Jeremy Grantham have backed agriculture investments as the most effective asset class to meet these needs in the long-term. Billionaire investor and philanthropist George Soros – the man responsible for crashing the UK currency in 1992 making over $1 billion dollar in the process – went so far as to say that he is “convinced farmland is going to be one of the best investments of our time.” As institutional investor begin to expand their knowledge within the agricultural sector and understand the fundamental trends that drive returns, more and more institutional capital is being allocated to this under invested asset class.

Some of the fundamentals that drive returns in agriculture investments and attract capital include:

Population Growth – U.N. estimates project the global population will swell to 9.2 billion people by 2050, an astonishing increase from the current figure of 6.9 billion. The lion’s share of this growth comes from developing nations, where at the same time increasing wealth dictates greater consumption of food and energy per capita. The U.N. predicts that agricultural production will have to increase by 70% to meet future food and fuel demand.

Rising Incomes – In developing nations, especially in Asia, incomes are rising rapidly. And as people become wealthier, their eating habits change to accommodate more a more protein richer, meat-based diet. In China alone consumption of meat has risen from 20kk per person in 1985, to 50kg per person in 2000, with many analysts reporting projections of 85kg per person by 2030. Taking into account this one country alone has a population of 1 billion, and the fact that 1kg of meat requires the input of around 8kg of grain to produce, the strain on global grain production is significant and growing.

Biofuel use – The use of biofuels as a replacement for traditional crude oil is driven by legislation in many countries, with international targets to generate clean energy for a substantial portion of overall energy production, in turn driving demand for feed stocks and land required to produce them, in 2008 for example, 25% of US corn crops went into biofuel production. Institutional investors have projected that almost 250 million acres of farmland will be required to meet biofuel production targets in the US, EU, Japan and the BRIC economies of Brazil, Russia, India and China. To put that into perspective, that would require 505 of the current farmland existing in North America, and around 6% of the total global supply of productive farmland.

Loss of farmland – We lose farmland every year to urbanisation and climate change, and many global authorities have warned that we are losing quality land at a much greater rate than we are replacing it. The United nations for example have said that we are losing good quality topsoil around 10 to 100 times faster than it is being replaced.

Water security – Much farmland requires irrigation to produce commercially viable yields, in the US, only 13% of farmland requires irrigation yet this small percentage consumes over 40% of all the country’s water resources. In China, over 40% of farmland requires irrigation, using up to 90% of the eastern giant’s fresh water. There is very little water resource left to expand irrigated production of food.

Death of the green revolution – The introduction of herbicides and fungicides in the 1970’s, known as the green revolution, allowed growers to increase agricultural yields through the application of nitrogen based fertilisers, and although yields have increased year on year for decades as a result, with an average annual increase of over 2% for 40 years, this has not led to a surplus in global grain stores, and since the year 2000, annual yield increases have fallen to less than 1%, less than the rate of global population growth.

Institutional investment – Pension funds, hedge funds and other institutional investors manage global assets in excess of $23 trillion. Since 2000, pension funds have increased investment in farmland and commodities from $6 billion to $320 billion, with a further $100 billion in agriculture investments from hedge funds. This still represents tiny fraction of the overall wealth of the institutional community of about 2%, with the vast majority of industry analysts projecting that this figure will rise to 5% by 2015. This huge demand for prime farmland assets is likely to support higher land prices in the short term, whilst other fundamental drivers support long term growth.

All of these factors cover to drive returns within the agricultural investment sector, regardless of the wider performance of traditional assets such as equities.

Those considering agriculture investments should seek consultation from experienced agriculture investment consultants capable of identifying and delivering primes assets and on-going management through locally experienced farming enterprises.

David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.

Click the link to download your complimentary copy of the DGC Asset Management Agriculture Investment Report

As investors continue their search for alternative investment assets that offer capital preservation, income and inflation hedging characteristics, and that are supported by sound long-term fundamentals such as population growth and economic expansion, many institutional investors such as Pension Funds, Hedge Funds, Sovereign Wealth Funds, Family Offices and UHNW Individuals are turning to farmland investments to generate long-term gains without dramatically altering the overall risk profile of a balanced investment portfolio.

Currently, around 1% of institutional investments assets sit in agriculture investment, and most think tanks and analysts predict that this will rise to over 5% in the next five years, creating a spike in short-term demand and adding further upward pressure to demand and therefore prices. This might be described as the beginnings of a bubble, much like many real-estate bubbles before, but the bigger picture looks different this time.

On one side of the equation we have an increasing demand for commodities such as food and biofuels as the population continues to expand at the fastest pace in history. To put this into context; up until around 1800, the global population had risen and fallen in line with our ability to produce food using the basic of agricultural techniques, yet since the introduction of hydrocarbons for energy and agriculture, the population has increased from only 800 million to over 7 billion in just over 200 years. At the time our grandparents were born there were around 1.5 billion people to feed, and by the time we were born, that number had increased to around 5 billion.

Economic expansion in developing economies also contributes as wealthier populations shift toward a more protein based diet consuming more meat. In China alone, 50,000 people move from rural areas to urbanisations, and their diets gradually shift towards meat. According to a report by the Centre for World Food Studies in Amsterdam, meat consumption in China was around 20kg per person in 1985, reaching over 50kg per person by 2000, and projected to reach 85kg per person by 2030. As 1kg of meat requires the input of around 7kg of grain, the growing pressure on global cereal supplies is immense. If everyone in the world consumed as many calories as the average American, we would need to find farmland equal to 2.2 Earth sized planets simply to keep up with demand.

One the flip side of this equation we have supply of food, and ultimately the farmland that produces our food. At every point in the 38 year commodity price cycle where real assets have undergone sharp re-pricing due to shock increases in demand at a time of limited supply, there has been opportunity to increase supply, either through the development of new farmland, or through the developments and application of new technology such as the use of fertilisers during the Green Revolution which led to a significant on-going annual increase in agricultural yields.

Currently, population growth outstrips output growth at a time where little or no new farmland is available to bring to cultivation, and yield increases from the use of fertilisers are diminishing towards zero. This unique set of circumstances dictate that there is no obvious remedy to the supply demand problem, supporting the theory that higher food prices are here to stay as little can be done to increase supply yet demand continue to grow.

Those investors choosing to agriculture investments in the form of the acquisition of quality farmland assets are likely to be best positioned to benefits from the underlying fundamental trends such as population growth and economic expansion. Investors that acquire quality farmland at today’s price are likely to enjoy inflation-linked capital growth in the long term, as well as an expanding income stream from rentals or the production and sale of food crops.

About the Author:

Download the DGC Agriculture and farmland Investment Report at the following link: http://www.dgcassetmanagement.com/agriculture-farmland-investment

Investment management, two words that are in the mind of anyone that has invested in a company or organization. What exactly do these two words mean? Strictly by definition, investment management is the professional management of assets and securities in order to reach an investment goal that is beneficial to the investor. Assets and securities can translate to numerous things from stock shares to real estate. The investor can be anyone, from a large business firm to an individual.

Directly related to investment management come the terms asset management and fund management. Asset management is a term that is commonly used to refer to the management of collective investments. Fund management is the more generic term. Fund management can be used when speaking about any and all forms of institutional investments, and can be used as well when on the topic of management by private investors. The professional investment managers who specialize and deal in advisory often have their services referred to as portfolio management or wealth management. These specialists often time represent the wealthy private investors.

In order to break down what takes place during the management of these investments, one would need to understand each related process. Among these processes are financial statement analysis, asset and stock selection, plan implementation and ongoing monitoring of the investment. All of these things can be handled by investment management services and advisers. This industry is both a large and important global industry which by itself is responsible for funds ranging in the trillions. As this is a global industry with investors from around the world, the trillions in funds are from every possible currency. Many of the largest companies in the world also take part in the industry by employing investment managers and staff, all of which results in billions in additional revenue.

How can all of this effect businesses? Generally speaking, large corporations often times control large amounts of shareholdings. Usually these businesses are more or less fiduciary agents instead of merely principals or direct owners of shares. By owning a large majority of shares, investors can theoretically control or alter a company they have shares in. This is possible thanks to the voting rights that the shares carry. How all of this could effect the management of a company is because of the simple fact that a share owner can pressure or possibly out-vote other shareholders at meetings.

Regardless of whether it is a large corporation or individual making an investment, having the proper tools and knowledge to manage that investment is critical when thinking of success. Corporations and individuals alike rely on specialists to oversee and manage their investments. Merely trying to jump in to the industry by purchasing shares and investing in a business most likely isn’t a sound choice. Seeking the aid of a professional with knowledge of the industry beforehand can help an investor from losing money in their investment, and overtime help to achieve a profitable outcome. When it comes to investment management, it is most likely the safest choice to seek aid from an expert, rather than attempting to do it yourself.

If you are looking for more investment plan and guide. Please visit www.investmentpress.net you will find a lot of useful articles about investment there.