Investment Articles

Income investing is a widely used strategy; indeed most investment portfolios – large and small – will hold at least some income investments. Historically, Investors and Financial Planners have relied almost exclusively on financial markets to access regular income streams; either through share dividends, cash held in high-interest deposit accounts, bonds of varying types or other nice income generators such as Permanent Income Bearing Shares (PIBS).

Today we find that more and more Investors and Advisors are seeking out alternatives to money-market investments as volatility, economic uncertainty and dismal interest rates converge to limit the income producing potential of traditional financial instruments. Many in fact are refocusing on that old favourite; property. Since records began property has been used as an alternative investment asset to generate income and cash in on capital gains driven by rising demand for good quality properties from an expanding global and local population.

The basic buy to let formula employed by so many Investors relies on the availability of mortgage finance to fund acquisitions, whilst rental payments from tenants cover the servicing of the debt and hopefully extra income on top. Over time the debt is repaid (or then property rises in value) and capital gains are cashed in when the property is sold. Many Investors however plan to keep hold of their debt free investment properties and simply live off the rental income.

In today’s market, there are some tremendous deals on investment properties in various global regions, as distressed sellers offer assets at a discount to market value to encourage a quick sale. This present a further opportunity for Investors as the discount ultimately counts as a profit when the property is refinanced or sold. Indeed, the savviest of Investors seek out regions where assets can be acquired with very deep discounts and sell the properties very quickly on the open markets in order to simply take the purchase discount as a liquid capital gain. This strategic approach to property investing works just like other income investments, in that properties can be acquired and resold in very short periods of time, and the original capital and profit rolled over into more acquisitions providing a consistent stream of capital gains, but often I much greater quantity then for the Investor who chose to buy and hold a single property.

Post sub-prime mortgage crisis and resultant financial collapse, there are a number of property markets where Investors can access their choice of investment properties very cheaply and where the ultimate buyers are able to find mortgages. This being the case, then this strategy can be put to work in a big way. Opportunities like this exist in a number of US States where banks are keen to rid their balance sheets of foreclosed properties, and are prepared to accept massive reductions against valuations, and where recapitalised Lender are starting to offer reasonable and sustainable home loans to low income families, often at rates as low as 3% fixed for 30 years. Another interesting opportunity is in Brazil, where the government provide guaranteed mortgages to low income families in order that they move out of dangerous favelas and into newly built, approved housing developments, in this case, Investors can provide the construction capital by purchasing a social housing unit pre-construction at a discount, and on completion the property is sold with a mortgage to a local buyer, and the Investor taking up to 20% profit over the course of just 12 months.

Whilst ample opportunities exist for cash-rich Investors to capitalise on current market conditions, it is vital to find a capable Partner with a track record of identifying and delivering such opportunities, and where it is possible to undertake or view sufficient due diligence as to be sure of the risks associated with investing in physical property assets.

David Garner is a Parter at DGC Asset Management, an Alternative Investments boutique specialising in productive natural resource properties and strategic property investments.

Investing in property, be it residential, commercial, agricultural, leisure, healthcare, student accommodation or some other niche property sector, is ostensibly the most popular and common form of alternative investment, and has been used as a low risk, long-term investment asset by many Investors. The main aim of the property investor is to capture income from rentals, and/or capital growth either through natural attrition or by adding capital value through development. Whatever the form or sector, property investments are solid, tangible and ‘real’ in that a property is unlikely to depreciate in the long term provided due care and consideration is given to due diligence in the acquisition stage.

Investment Strategy

The traditional form of property investment is the simple leveraged buy to let, where an Investor will acquire a property using a combination of cash and mortgage debt, and seek to cover the mortgage costs with rental income. This strategy is ideal for the long-term Investor with ample time to allow the rentals to completely pay off any mortgage debt. Older Investors should be wary of taking on long-term debt to fund property acquisitions. The buy to let strategy can be applied to residential, commercial, agricultural and other sectors including student accommodation and healthcare properties.

A more opportunistic approach is to identify and acquire distressed assets at heavy discounts, and aim to resell quickly in the open market in order to capture the inherent profit. This strategy removes the long-term financial liability associated with property ownership, and also removes reliance on capital growth as the main driver for profit.

Land development and planning are also valid property investment strategies, although these are often large and complex projects and not suitable for inexperienced Investors. One way for smaller Investors to participate in property development is to buy off-plan, where they receive a discount for agreeing to purchase the property before it is built, this again capture inherent profit, and the investor may choose to sell the property on completion of the building works, or they may choose to rent the property out. Other options for Investors seeking exposure to development property are smaller developments or refurbishments involving the renovation of property in order to add value.

Each strategy carries its own set of risks, and Investors considering adding property exposure to their portfolio should consider their end goals, be it income, growth or both, and seek out investment opportunities likely to deliver on those goals. As always, due diligence is required in the research, investment planning and acquisition phases of property investment, and often Investor will require expert help for legal and property professionals in order to properly identify the risks associated with the property or project in front of them.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in alternative property transactions in the real estate and natural resources sectors.

This article focuses primarily on real-asset investments, and this section is designed to highlight some of portfolio planning characteristics of physical assets when considered as part of a well-diversified and balanced portfolio of investments, as well as some of the inherent risks to be considered when allocating investment capital to specific, niche investment sectors or projects.

Whilst real or hard-assets offer a number of significant benefits including reduced volatility, tangible asset values and the potential for superior investment performance that is not reliant on the performance of traditional financial investments, potential investors must give equal consideration to the potential for relative illiquidity, operational or management risks specific to the asset class, and of course counterparty risk exposure when investing in assets that require on-going expert management in order to maximise returns and minimise downside potential.

Portfolio Planning Advantages

Every asset class exhibits different characteristics when considered from the point of view of an Investor or Financial Planner, and Investors invariable choose to invest in specific assets in order to achieve specific goals such as risk mitigation, portfolio insurance, superior returns and a hedge against inflation or some other potential economic impact on the value and performance of their portfolio.

Here we look at some of the broad portfolio planning characteristics associated with a range of physical assets considered as alternative investments.

Capital Values

By their very nature, physical assets retain a disposal value throughout most economic circumstances, and whilst asset values will fluctuate from time to time, Investors allocate capital to hard-assets in order to underwrite the value of their portfolio and insure against the possibility of the values of listed financial assets falling sharply at any given moment. In fact, certain assets such as gold hold a ’safe-haven’ appeal, often rising in value when stock markets falls as Investors sell equities and buy gold.

Non-Correlated Returns

The fundamentals that support value growth and income associated with real-assets are often far removed from the fundamentals that support traditional investments. Often, alternatives share a direct negative correlation with the performance of equities and bonds, affording investors the opportunity to balance their portfolios and make gains when other portfolio components lose value or underperform. This strategy is sometimes referred to as portfolio insurance.

Diversification

Key to risk-mitigation in financial planning, diversification simply means spreading ones investment risk across abroad selection of holdings, reducing the likelihood that too many eggs are held in one proverbial basket. Diversifying an investment portfolio into a range of holding across different sectors and assets reduces the risk that poor performance in any one asset will have too big an impact on the portfolio as a whole.

Inflation Hedge

A number of alternative investment assets share a strong positive correlation with inflation, rising in value faster than the prevailing rate of inflation. This effectively mitigates the impact of inflation on the real value of investment portfolios. Pension funds and university endowments, along with insurance companies and other institutional investors buy into long-term investment assets such as farmland and forestry for this very reason.

Superior Returns

As detailed in the chart overleaf, many alternative investment assets have outperformed traditional investment assets over the long-term by some considerable margin. Whilst all sectors and strategies carry inherent risk, carefully selected and well-managed real-assets have been shown to generate superior investment returns for the Investor capable of tolerating short term price fluctuations and long-term investment horizons. Operational asset like property also generate income useful when other income assets like cash deposits underperform.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

Genuine alternatives to financial investments are considered to be ‘real’ or ‘hard-asset’ investments. Immoveable property such as real estate, farmland and timber properties are considered to be viable alternatives to financial assets, and moveable property like gold bullion, fine wine and rare stamps are also considered to be genuine alternative investment assets.

The case for real-asset investing is compelling; those with sufficient expertise in order to identify good quality assets in high demand can generate substantial financial gains as the inherent value of their assets grows over time. But in almost all cases, specific expertise is required in order to identify, properly value, and measure the risk associated with niche assets like timber properties or fine wine, and a lack of credible asset analysis, along with a non-existent regulatory framework have made this area of investing very high risk for most investors, many of whom have been subject to mis-selling, misrepresentation, poor advice or outright fraud.

Investors acquire certain assets as they are unlikely to depreciate over time, and when demand for the asset or its produce increases so too does the inherent value of the asset itself. So properties that are finite in supply yet have an essential function such as agricultural land, and forestry investment properties, are likely to see values rise as the global population grows and developing nations become wealthy and demand more resources. Niche sectors like fine wine also benefit from increasing demand for finite assets. As only a certain volume of a particular vintage is ever produced, the value increases over time as existing stock is consumed, and more buyers come into the market demanding the best quality product. The same could be said for other collectibles like stamps, antiques or rare coins. The basic underlying strategy remains relatively static across most in real-asset investing; acquire useful or desirable tangible assets, of which supplies are limited and demand for which is rising.

Core to the success of any property or asset-based acquisition for investment purposes is due diligence. Investors must be assured of the value they are receiving for the money they invest, and of the risks they face as an owner of such an asset. Often times such investment projects are structured so as to raise sufficient capital not just for an asset purchase, but also for its improvement and/or future operation or management, and in these cases it is paramount that an investor has ultimate confidence in the knowledge and ability of all of the counterparties which have an on-going responsibility to the good and proper management of the asset.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

During the past five years, the global economic meltdown has spurred a spate of reorganizations of the investment portfolios of major institutional investors, many of which are now allocating more capital to real-asset alternative investments in an effort to reduce exposure to volatile financial markets, generate superior investment returns, and underwrite the value of their portfolios with the capital value of niche, income-generating property assets including forestry investments and farmland investment properties that are unlikely to depreciate in the long term.

The logic is sensible, and the likes of Yale University Endowment and their Harvard counterparts have all entered into long-term farmland and forestry investments as part of an overall refocusing of their investment strategy. Historically, land, gold and gems of varying types have been the only store of wealth, it is only since the introduction of fiat currencies that investors have sought to build cash gains, rather than aiming to build a sizable portfolio of land, property or other physical assets. Now, many smaller investors are taking heed of the big boys’ new strategy, and investigating the potential benefits and risks associated with investing in commercial timber properties and agricultural land assets.

Both of these assets classes exhibit characteristics that hold particular appeal during times of economic turmoil. Not only have assets in both sectors outperformed the majority of traditional investment instruments, but also, investment returns are driven by factors and variables that bear little impact from turmoil and volatility in traditional equity markets. Trees continue to grow to valuable timber whatever the economic weather, and increasing demand for resources from China, India and other fast-growing emerging economic drives up the price of sustainably sourced commercial timber and demand outstrips supply.

Capital growth and revenue from farmland assets are also supported by increasing demand. More people simply require more food, and improving diets in emerging market economies require greater inputs of grains, water and other inputs including fertilizers and fuel. All these factors combine to drive up commodity prices (and farm income) on an annual basis, and a lack of suitable land in the face of growing demand also supports long terms capital values.

So, on paper both farmland and forestry investment assets offer a number of advantages to the investors, but there are also a number of asset specific risks that must be acknowledged and understood before venturing into this type of asset as part of a diversified portfolio. Here are some of the headline risks associated with agricultural property investing:

Sectoral Risks

Both farmland and forestry investments display risk-potential that is specific to owning and operating agricultural assets in general. Income is derived from the production and harvest of commodities, be it timber, biomass, energy crops, grains or livestock. Revenues streams can be volatile, with growers subject to prevailing market conditions at the time of harvest. A dip in prices may cause an entire years’ revenue to be wiped out. Energy prices also factor in, especially in relation to farmland. Higher oil and gas prices mean higher farm input prices, further squeezing profit margins.

In the case of forestry investments, value can be stored on the stump during periods of decreased timber demand (and deflated timber prices), as property owners simply leave their trees to grow larger and more valuable until market conditions dictate a sensible time to harvest and sell. There are of course a number of other risk-factors associated with investing in real assets in the agricultural sector, but the major sectoral considerations are volatility and immediate demand for produce.

Location Risks

It is written, and I personally believe, that the vast majority of demand for resources such as energy, timber, food and other commodities will come from fast-growing emerging market economies. China alone exhibits economic growth on such a scale as to dwarf that of developed economies. When 3 billion people drive a car, live in a timber and concrete house, and eat a western diet, then demand for energy and raw materials will reach a level hitherto unseen.

It stands to reason then, that agricultural assets located in regions close enough to, or even inside emerging market economies are best-positioned to participate in the supply chain, and offer enhanced returns for investors due to low asset prices and high demand for end products. Whilst emerging markets offer the best opportunity for superior investment returns, these locations also carry risks not associated with developed nations. The potential for expropriation of land and property by unfriendly governments attempting to win votes poses a very real risk, and investor should carefully investigate the security of title for international investors before committing funds.

Asset Specific Risks

This is where experience and expertise comes in. farms and forests are niche assets and require careful expert management in order to mitigate risk and maximize upside potential. Flood, drought, disease, pests and soil degradation may all affect the income potential (and therefore capital value) of agricultural property assets. Growing commercial timber takes skill, knowledge and experience, and running a successful farm requires the same. My advice? Only ever choose to invest in agriculturally productive properties if you are able to access and retain expert operational partners capable of managing specific assets in the region you wish to invest.

In summary, it could be said that investing in farmland, or timberlands, offers the investor the opportunity to generate non-correlated returns without dramatically altering the overall risk profile of a portfolio. But there are risks, and the risks to be considered are not necessarily the kind of risks that investors are used to acknowledging or assessing. So seek the advice of an experienced consultant with a track record of delivering successful projects, and make sure that you are capable of withstanding long-term illiquidity, as both farmland and forestry investment assets are long-term investments, and investors must consider that they will ride out the bad times along with the good, in the hope to retaining control of some of the world’s most essential, productive assets.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

Traditionally, investors have held a slim range of investment assets within their portfolios which have consisted primarily of stocks, bonds and cash, some more adventurous investors have even held physical gold and property. Now private investors are following the march of pension funds and university endowments; investing in a range of real asset alternative investments including niche real estate like commercial timber properties and agricultural land, in the hope that increasing demand for resources from emerging economies will drive both revenue from the sale of essential commodities (timber, food, biomass), and capital growth as suitable, productive assets become more scarce. Other investors, especially the wealthy, have also been investing in more esoteric alternatives like fine wine, rare stamps and a host of other tangible properties where demand will hopefully outstrip supply and generate growth.

There is of course a logical reasoning behind the allocating of capital to real assets investment alternatives; not least the fact that recent economic turmoil on a global scale hit portfolio values hard, and many investors coming to the end of their investing life feel that they may not have sufficient time to recoup losses, especially whilst markets remain so volatile and supported by central government policies like quantitative easing. These investors invariably want to acquire assets that are unlikely to depreciate overnight, and may benefit form the upside of exponential demand growth from China and India, where economic development is driving mass consumption of food, commodities, timber and energy on a scale that the world has never seen before.

There are a number of risks associated with these kinds of property-based alternative investments, with illiquidity and asset-specific risks taking centre stage, and investors should certainly not part with capital unless they fully understand and accept that risk-planning is quite different with such assets. Forestry investments are a great example. There is a range of direct forestry investments available for smaller investors wishing to invest directly in timber producing properties, but the vast majority have been improperly structured, and in most cases are designed to generate a profit from sales of plots to investors, rather than to generate income from timber harvesting. One such example I saw recently was offering small plots of land in an established forest in Brazil. Investors are invited to acquire leasehold to a small plot which is then managed to produce commercially viable timber at harvest. These kinds of schemes can work well; they allow forest property owners to raise capital from investors, without having to raise debt, which is difficult to service due to the long-term nature of forestry investments. So investor get to participate alongside the forest owner, and benefit from economies of scale in the on-going management of their plot alongside the rest of a property and other investors plots. This model means that investors tend to pay for the entire management of the plot up front, so they invariably pay more than the disposal value of the plot as they are also investing in the on-going management and infrastructure etc. In reality, this example was charging investors £100,000 for a 1 hectare plot of forest which, in my opinion, is a totally unjustifiable profit margin. I would expect to pay no more than $30,000 to $40,000 in total for the lifetime of owning a 1 hectare plot stocked with timber.

Conversely, I have also seen and worked with other examples that offer excellent value to the investor, and where the management teams have been able to demonstrate their experience of running an agribusiness; of operating successfully in the timber trade; and of having a track record of starting and building successful projects, companies and/or investments. I feel that a lot of people will lose a lot of money from investing in assets they don’t truly understand, and anyone considering taking the plunge into an area with which they are unfamiliar, should seek the advice of someone with experience of identifying, assessing and delivering successful investment projects within the sector of interest.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture, forestry and renewable energy sectors.

Historically, wealth has always been stored in the capital values of assets like land, property and gold. Those were the assets on which kings built kingdoms, and as essential, non-perishable assets, ownership of large amounts of any of these things resulted in wealth and power. It is only since the recent (in historical terms) introduction of fiat currencies and financial markets that investors seek to build up piles of ‘currency’ instead.

Spurred by the recent global financial meltdown, most, if not all investors, hold less faith than ever before in entrusting their future to financial markets, with many having recently witnessed life savings and pension values collapse as the markets once again crashed. Now, investors are seeking alternatives investments, once again turning their focus to real, tangible assets with an essential function that are in low supply and high demand. Institutional investors are buying farmland, as a growing global population will always need feeding, and what little arable land there is will become ever-more valuable over time, in real terms and financial terms. Others are buying commercial timber properties in order to grow hardwoods to meet new demand from growing populations in China, India and Latin America, as these emerging markets forge ahead with resource intensive growth and development. Some investors are turning their backs on savings accounts and instead buying physical gold every month or year, building a portfolio of the precious metal that will likely generate a far superior cash value to traditional savings tools after ten years. There is in fact a whole field of investment alternatives to choose from,; including fine wine, renewable energy assets, and rare stamps and coins, all of which rise in value as their rarity increases and demand from new buyers emerging from ‘new wealth’ economies increases.

The questions for most investors though is; where to invest? Should one consider investing in a case or two of vintage plonk? or better perhaps to own some trees or a bit of land or gold. Well, the answer is different for everyone. Alternative investment assets all behave very differently, and their values or income potential affect ted by variable unique to the sector or specific property or asset. Most alternatives however share a common characteristic, and that is illiquidity. As mostly tangible and property-based assets, alternatives to traded financial instruments might be difficult to sell quickly or at all in some markets, and investors must make themselves aware of the asset specific risks associated with whatever it is they choose to invest in.

Investors seeking income will find some investment alternatives to be more suitable than others, and the same could be said for those investors seeking stable, long-term capital growth. All however should seek the advice of an experienced consultant able to properly advise on the risks and opportunities associated with the specific asset class that is of most interest. Do your own research, and choose to work with a professional with experience and a track record in identifying successful investment opportunities that have achieved their objective.

David Garner is Partner at DGC Asset Management, an alternative investment boutique specialising in property transactions in the agriculture and renewable energy sectors.

Recent economic turmoil, played out over the past 5 years, has caused many investors to questions the logic of holding all of their assets in stock, bonds and cash. Whilst market conditions are positive, and equity values rise, all is well. But recent history has demonstrated that years of capital gains can be reversed in a matter of days, or even hours. Large investors such as pension funds, and smaller investors saving for retirement, are now seeking to allocate a portion of their capital to alternative investment assets that retain a capital value throughout any prevailing economic climate, and, for the long-term investor, capture capital growth driven by a rising demand for essential and luxury assets in line with a growing global population and rising wealth in emerging market economies like China, India and Latin America.

Here are 3 investment alternatives that share a low or negative correlation with the performance of shares, and might, for many investors, offer a solution to the question of portfolio diversification and risk-management.

1. Gold investment

Gold has long been viewed as a safe, stable asset that provides insurance against general market volatility. When equity values fall, gold values rise as investors sell their shares and buy into a ’safe haven’ investment like gold. Thus, holding gold as part of a diversified portfolio creates growth when other assets lose value, effectively creating a balance and countermeasure to stock market exposure during a downturn market. Gold has also outperformed most other assets, gaining almost 30% per year for the past five years.

2. Forestry investments

Trees are becoming ever-more popular alternative investment assets. Well-managed commercial timber plantations derive financial returns from the biological growth of trees into valuable timber and other commodities which can be harvested for income. As trees continue to grow regardless of the economy, forestry investments in key regions where trees grow quickly, and where demand for timber is highest (read emerging markets), can produce returns of between 10% and 20% p.a. over a sustained investment period of 10 or 20 years. There are a number of unique risks associated with this alternative property investment, and Investors should partner with an advisor with a track record and experience of identifying, measuring and delivering successful forestry investment projects.

3. Farmland investments

Agricultural land is in worryingly short supply, and forms the basis of all agriculture and food production. Without enough suitable land to grow crops and raise livestock, demand for food outweighs supply and farmland values rise as the true value of the assets class becomes apparent. Those in control of food-producing land may in fact be in control of the world’s most valuable asset in 10 or 20 years’ time. As the global population has grown so quickly over the past 100 years, the amount of suitable arable land per person had halved, and changing diets in advancing economies require the input of more resources to grow food, creating a double-whammy of demand. Farmland investments therefore capture long-term capital growth driven by population growth and rising levels of wealth in emerging markets like China and India. There are a host of risks associated with agricultural land investment and again, investors should seek out the advice of a consultant with a track record and experience of identifying, measuring and delivering successful farmland investment projects.

In summary, all of these assets are likely to grow in value as demand continues to grow, whilst supplies remain fundamentally limited, and investors able to find a suitable entry into any of these alternative asset classes could generate superior investment returns, provided they are prepared to hold the asset over extended period of time and can tolerate the illiquidity associated with tangible, physical assets.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

There is a great range of alternative investment assets to consider for those amongst us seeking to reduce their exposure to stock, bonds and cash, including a host of ‘real’ or ‘hard’ assets. For the investor seeking long-term gains in a stable, low-risk environment, tangible assets in short supply and high demand offer some exciting opportunities to hedge inflation, and capture capital growth driven by increasing demand from a growing global population and economic expansion in developing economies.

Gold bullion and coins such as sovereigns are perhaps the most common form of alternative investment held in an average portfolio. Gold has long been viewed by investors as portfolio insurance, sharing a negative correlation with the performance of equity markets. This is because investors sell stocks and buy gold when equity markets fall, or confidence in the markets or economy as a whole drops. This causes a great spike in demand for gold as investor pile into what is ultimately a finite resource. This causes gold prices to rise and therefore, the fall in equity values is offset by rising gold values within a portfolio. Gold should be viewed as a long term investment, and there are higher costs associated with buying and selling physical go0ld bullion, and a cost to store it securely too, so attempting to trade in and out and capture small price movements is inefficient, risky, and not at all how the asset class should be managed. Gold is an ideal pension investment, and one that investors can buy into over time, perhaps allocating a small amount per month to acquire more gold each month.

Gold has performed particularly well over the past 5 years, rising in value by around 25% per annum as global economic turmoil has resulted in a surge in demand amongst investors of all shapes and sizes. Many analysts predict that gold prices could continue their upward march, rising from around $1,600 per troy ounce, to as high as $3,000 or even $4,000. If gold were to continue to rise in value at 25%, then a $1,600 investment would be worth nearly $12,000 in ten years time, although this scenario is wholly unlikely.

Let’s assume a capital growth rate of 8% per annum average over ten years. If an investor spends just $1,600 per annum on gold each year, the resultant growth would result in the investor owning some $23,178 worth of gold, having invested $16,000 at a rate of $133/month (a profit of $7,178). An investment in a bank account yielding 3% at $133/month over ten years would result in a total pot of just $18,585 (a profit of $2,585). This shows that even with a rate of growth much lower than has been demonstrated in the past five years, investing in gold can provide investors of all shapes and sizes with investment alternatives worth considering.

It is important to note however, that these calculations do not factor in buying and selling costs, but as our theoretical investor won’t be selling, (and should even buy more is the prices falls at any point), and will only be buying once per annum, the impact of dealing fees and the buy/sell spread are minimised.

There are of course a many different alternative investments to consider, from fine wine to gold, through to forestry and farmland, and investors and Financial Advisors should seek the assistance of a consultant or advisor with specific experience of dealing in the asset class of interest.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in real assets and property-based transactions

In the face of continued economic uncertainty, and volatility in mainstream investment assets, many investors are looking further afield than stocks, bonds and cash in order to generate much needed income and growth. One only has to conduct a brief search on the internet to find a whole range of investment alternatives, from portfolios of fine wine, to the more traditional gold bullion and property. So where does the inexperienced investor, or indeed financial advisor, start when considering the prospect of adding alternative investment assets to a diversified portfolio?

Well, the first thing to consider in my opinion is the status of the investor him/herself. Should the subject even be thinking about alternatives? Do they have a large enough portfolio of investments to allocate 10 or 20 per cent of their capital to relatively illiquid assets? Could they be declared a ‘Sophisticated Investor’ or ‘High Net Worth Individual’ thus allowing them to consider a wider range of investment structures which may only be open to certain types of investor?

At this stage of the process (very early on) I would establish the status of the potential Client. A few direct questions will reveal whether the investor has the requisite experience to be certified as ‘Sophisticated’ or ‘High Net Worth’. This being the case, further enquiries into the specific requirements of the Client follow, with the aim of building a picture of the tolerances of the individual in terms of risk, illiquidity, investment horizon and capital adequacy. Here, we can also ascertain whether this Client is seeking income form their investments, or whether indeed they are seeking longer-term capital growth or perhaps even the tax advantages that may be associated with particular alternative investment assets.

If a Client happens not to fit the criteria of a ‘Sophisticated Investor’ or ‘High Net Worth Individual’, then it may be necessary to refer him or her to a Financial Advisor, who, after a comprehensive review of the Client’s financial position, will be able to ascertain whether or not the Client could tolerate the aforementioned risks and illiquidity often associated with real or non-financial assets, and what portion of their portfolio might be suitable for such assets.

Once we have a complete picture of what the Client may tolerate, and what they want to achieve, it is possible to start suggesting asset classes that may of interest. Taking into account requirements for income, attitude to risk and illiquidity, and investment horizon, we are able to disregard assets that will not fit well with the individual.

For the investor seeking capital growth and with no requirements for income, it might be suggested that fine wine or philatelic investment (such as rare stamps) might be an appropriate place to begin. Both assets derive capital growth form demand fundamentals and inherent rarity of the asset, are less reliant on the fundamentals of financial markets, and therefore fit comfortably with investors seeking physical assets that retain (and perhaps even gain) value throughout general market dips. Gold Bullion or Coins might also be another area of interest, providing ‘portfolio insurance’ during downturn markets. Other long-term growth assets are timber, agricultural land and real estate, some of which also generate a modest income.

Income seekers might look towards niche real estate assets, such as below market value property or agricultural properties where income is derived from rentals or the production of certain crops. There are opportunities to invest in established agro-forestry plantations, where investors acquire part of a working plantation which is in turn managed by the plantation owners to produce a variety of crops from bamboo to biofuels. Such opportunities can be risky, and potential investors and financial advisors might find value in consulting with an entity capable of properly assessing the risks and opportunities associated with such investments.

In summary, alternative investments might not be for everybody, but instead only for those investors capable of bearing the financial risk associated with physical assets. It must be noted that the vast majority of physical investment assets such as property or fine wine are not regulated, and so investors have no access to compensation schemes if things go wrong. But provided that the asset, location, sector and counterparty risks are properly identified and explained, experienced investors and those who have been in business for themselves, will be able to make common sense decisions as to what, if any, alternative investments might suit their portfolio.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.