The role of alternatives in a portfolio
By Chris Paton
Alternative investments can play a vital role in a portfolio. Yet many Australians may be unsure about what they involve. Here are some answers.
Mention 'alternative investments', and many people are left scratching their head.
Plenty of investors have heard of alternatives but have no clear understanding of what they are, what they bring to a portfolio, and just as importantly, how to access this type of investment.
By way of background, La Trobe Financial has been managing alternative assets for over 70 years.
So, we know firsthand the benefits that alternatives can bring to portfolios such as the potential for attractive returns, regular income, and much-needed diversification.
With this in mind, let's take a closer look at what exactly is meant by alternative investments.
What are 'alternative investments'?
Retail investors have traditionally faced a simple choice, choosing from cash, bonds, and equities.
Everything else (including property) is technically regarded as an alternative investment.
Even among investors who add equities to their portfolio, this choice usually means holding just a few stocks.
The latest ASX survey shows fewer than half those investors with listed Australian shares think they have a diversified portfolio. Among new investors, the overwhelming majority (84%) hold three or less stocks.
Clearly, there is considerable need for more portfolio diversity.
The challenge is that public asset markets don't always meet this need.
In the Australian context, around 2000 businesses are listed on the ASX. This is a tiny fraction of the 2.5 million active businesses across the country. This gap is further amplified if we look at the global picture.
So it stands to reason that there are exciting investment opportunities outside of public markets.
It is these opportunities that alternative investments target, with options spanning the full risk/return spectrum - from non-bank lending for residential property, through to private debt for unlisted companies, as well as private equity.
A key strength of alternatives
The sheer breadth of alternative investments means there is literally something for everyone across the risk/return spectrum.
Adding to their appeal, alternatives can deliver equity-like returns often with lower volatility.
This is because returns on alternatives are not correlated to traditional asset classes such as listed shares.
This highlights how alternative investments can play a key role in a portfolio, with their potential for regular, less volatile returns.
What to watch out for when selecting a manager
With so much going for alternative investments, it is no surprise that the big global institutional investors have 25%, in some cases 50%, of their portfolios invested in alternative assets.
Fortunately, this is an asset class that is increasingly available to retail investors.
One of the most popular, and certainly the simplest option, is to invest in alternatives via a managed fund.
That said, not all alternative investments are alike.
Investors need to do their due diligence, looking at the long-term track record and expertise of the manager, and thinking about the type - and quality - of alternative assets going into their portfolio.
In particular, it pays to be clear about:
- What you are investing in
- The role alternatives will play in your portfolio (diversification, regular income or long term capital growth), and
- Fund transparency - that is, how well you know what is going on under the hood.
When it comes to transparency, some parts of the alternative investment space are still on a journey of improvement. But not at La Trobe Financial.
With the benefit of over seven decades of experience, we know that investors like to have the latest figures at their fingertips.
That's why we publish portfolio reports on our website that allow investors to check how their money is invested 24/7.
Bringing it all together
All investors are interested in assets that will help them earn better returns, and it stands to reason that alternative assets should be part of a portfolio mix.
Right now, there is a lot of hype around alternatives, especially private credit (that is, non-bank lending to unlisted companies).
Our depth of experience makes La Trobe Financial a leader in this space.
Our Australian real estate private credit strategies have been available to investors for several decades.
More recently we launched our US Private Credit Fund with a targeted distribution return of 8.5% annually net of fees and pre-FX.*
With many new entrants coming to the market, now is the time to invest in experience.
La Trobe Financial's extensive track record demonstrates how an experienced asset manager can harness alternative investments to bring diversity, strong returns and regular income to an investor's portfolio.
*The target distribution return is net of fees and costs but excludes any adjustments for FX rate fluctuations. The target return is reviewed monthly and may change. This target return is determined with reference to the return benchmark of the Secured Overnight Financing Rate (SOFR) + 3% as at May 31, 2024. This is a target return only and may not be achieved.
Any financial product advice is general only and has been prepared without considering your objectives, financial situation or needs. You should, before investing or continuing to invest in the La Trobe Australian Credit Fund and La Trobe US Private Credit Fund, consider the appropriateness of the advice having regard to your objectives, financial situation or needs and obtain and consider the relevant Product Disclosure Statement for the fund. Past Performance is not a reliable indicator of future performance. La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321 and the La Trobe US Private Credit Fund ARSN 677 174 382. It is important that you consider the relevant Product Disclosure Statement (PDS) before deciding whether to invest or continue to invest in the fund. The PDSs and Target Market Determinations are available on the La Trobe Financial website.
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