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Alternative Investments and Pension Funds

If recent stock market activity does nothing more, it shows us that volatility continues to be the name of the game when it comes to investing, as £120 billion is wiped off the value of UK shares alone in the course of four days.

Investors have traditionally employed a number of strategies such as asset allocation and diversification in an effort to reduce risk. But more recently than ever before, the big investment players such as Pension Funds, Hedge Funds and Sovereign Wealth Funds are turning to alternative investments to generate returns that are not dependent on the performance of traditional assets such as equities and bonds.

A recent report by Morningstar and Barron’s; the 2010 Alternative Investment Survey of U.S. Institutions and Financial Advisers, has revealed that institutional investors have allocated more than 25% of their assets under management to alternative investments.

Barclay Capital also recently stated that pension funds have added substantially to their farmland and commodity holdings, with institutional investors expected to hold up to $1 trillion in agricultural assets by 2015, way up from a mere $6 billion held in this asset class ten years ago.

 

Both institutional and private investors are hoping to generate superior returns in order to boost the performance of their portfolios without dramatically altering the over risk profile, and many see farmland and timber as ideal assets in the current economic climate.

Forestry investments generate profits from the production and sale of timber, so investment returns rely on the biological growth of trees, rather than the performance of financial assets. And with farmland, growth in demand for food, feed and fuel is pushing up the price of food, which bolsters farmland incomes and in turn makes productive land a more valuable asset, capturing capital growth.

There is most certainly an appetite for simple, transparent and tangible assets that are unlikely to depreciate as they are supported by solid long term fundamentals nod remain in high demand, and where investment performance is not dependent upon the decisions and choices of Fund Managers or economic or political news. Many investors consider that owning assets within the food, energy, water and commodity markets are likely to prove more profitable than investing in companies as demand for these essential commodities will continue to grow as the population expands at the fastest pace in history.

China recently invested $1.5 billion dollars into a farmland development project in Argentina, bringing investment capital for infrastructure, and technical expertise in large-scale irrigation, in exchange for long-term leases of farmland from the Argentine Government virtually rent free.

Swedish and American Pension Funds have recently committed hundreds of millions of dollar in investment capital to farmland purchases in order to capture inflation in the capital value of the asset, whilst also generating income streams, useful for meeting commitments in the short term to member of their schemes.

So alternative investments may be the order of the day, but barriers to entry do exist for smaller investors, and those considering such investments should seek advice form experienced Consultants.