3 Alternative Investments for Stable Capital Growth

By David D Garner

 

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.

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