As stock markets and bond markets continue to display the sort of volatility that causes Investors to break out into a cold sweat, many are starting to investigate real-asset alternatives to traditional financial assets in an effort to identify opportunities to capture growth and income that is not wholly reliant on the performance of financial markets or the general economy.
There is certainly an increasing appetite for real-asset alternative investments, from fine wine and art, through to land and collectibles, yet a lack of credible performance data and regulation leave many at a loss as to where might be a suitable home for their hard-earned savings in the alternative investment space.
Whilst assets like fine wine and art rely almost entirely on the wealthy as an end market, growing economies in developing nations are creating a super-size middle class which is consuming more resources and consumables such as food, fuel, cars and energy at an astonishing rate, creating a huge spike in demand that shows no sign of abating, creating investable opportunities for savvy Investors able to identify those areas where demand is strong and fundamental limits in the supply chain create short, mid and,long-term value growth for those in control of such assets.
Here are a few examples of real-asset alternative investments that have displayed some extremely desirable characteristics such as capital preservation and a hedge against inflation throughout the last four years of economic turmoil.
Renewable Energy Investments
As populations continue to expand, natural energy resources continue to diminish, international legislation combined with government incentives create profitable opportunities for those in control of energy-producing assets that do not depend on the input of natural resources and therefore generate energy – which can be sold at a profit – during any economic climate.
In the UK, government backed feed in tariffs (FiT) creates opportunity as energy companies must purchase any electricity you generate and feed into the grid. So those in control of solar panels, wind turbines and other energy-producing assets capture market-beating income of between 10% and 20% per annum for up to 25 years. No income-generating financial assets share dividends or bonds can do that.
Forestry Investments
Timber, when considered as an alternative investment asset class is quite unique, not only does the price of timber rise over time – usually at or above the rate of inflation, at the same time trees continue to grow into larger assets with more timer to sell per tree. This combination of biological growth and price growth creates a compound return for the long-term Investors seeking to grow their wealth outside of traditional financial assets.
Forestry investments have outperformed the majority of other asset classes over a range of timeframes, with the best value to be found in emerging markets where demand for timber from growing populations and expanding economies is greatest. It is not uncommon for forestry investment to deliver returns ranging from 10% to 20% IRR over extended timelines dependent upon the location and structure of an individual investment.
Since around 2008, the UK market has come awash with direct forestry investments aimed at the retail Investor, usually based on the lease or sub-lease of a small plot within a larger, managed plantation. In most cases these products have promoted completely unrealistic returns, with some even suggesting that ã20,000 could turn into over ã1 million in 20 years or so. This real-estate based model also exposes the Investor to a substantial counterparty risk, being entirely reliant on the success of the Vendor for the lifetime of their investment in order to realise any returns and not simply be left with a worthless lease and no realistic access to their plot or trees.
That said, there are a few forestry investment opportunities worth considering, and investor are best advising to seek the assistance of an independent third party with experience of assessing timber investments in order to avoid undue counterparty, asset, location and sector-specific risks that can be associated with this interesting asset class.
Agriculture – Investing in land
Agricultural land is the cornerstone of the human race, it provides the food we eat, the feed used to raise our livestock, and also plays an increasingly large role in providing the fuels we use to power our transport requirements.
The global stock of land suitable for agricultural production is actually falling quite rapidly when considered on an acre per capita basis, falling from 0.42 hectare per person in the sixties, to less than half that amount today. At the same time, not only are there more mouths to feed but each person on the planet is consuming more food as population in emerging economies become richer and demand more calorific, protein based diets which require substantially more resources to produce in terms of grain, water and also energy.
Those Investors in control of productive agricultural land are likely to retain possession of the most valuable resources on our planet, and at the current rate of global expansion, those assets are likely to become ever-more valuable over time, and the income derived from them is also likely to increases as competition for food resources at the global level continues to increases, with those prepared to pay more taking the lion’s share of crops.
In the UK alone, farmland has risen in value by some 10% per year for over ten years, and land close to the food supply chain in Asia, Latin America and Africa even more so.
In summary, the investing climate in 2012 is likely to remain fraught with volatility, and alternative investments will continue to grow in popularity as Investors seek superior returns and a safe haven from potential losses.
David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.