Why most investors should avoid “alternative” investments

By: Tim Bennett
Whilst no-one knows what the future holds, CSFB’s 2018 Yearbook reveals that over the last 100+ years, equities have performed better than just about every other asset class. Here’s a summary.

Why most investors should avoid “alternative” investments

The opportunities available to investors are opening up fast, whether you are interested in art, antiques, cryptocurrencies, gold or peer to peer lending. The problem is that this choice comes at a price – the risk of buying something you don’t really understand, that subsequently doesn’t deliver the returns you might have been promised. So here I want to take a quick look at the world of “alternative” investments using some insightful data from investment bank, CSFB.

What are alternatives?

First off, let’s define what we mean. On the left of the slide below is a list of what are usually seen as conventional asset classes. On the right, a list of “alternatives”. Property is an oddball, as it shares some of the characteristics of both, a point we will come back to.

What makes an asset “alternative”?

CBSB’s 2018 Yearbook classes assets this way if they share certain features. These are worth noting as an investor. The place to start is to contrast these assets with more conventional ones, such as shares;
So shares, for example, can be usually bought quickly and cheaply and most offer some sort of income, albeit the amount varies and is not guaranteed. Alternatives, or “collectibles” are different as I summarise here;
The key thing to bear in mind is that this type of asset requires a degree of expertise both to buy and store well – classic cars, for example, need to be properly and securely stored (even, vacuum sealed) and also painstakingly maintained if they are to hold their value. However, beyond that there is a more important question for investors – what are the returns like?

A revealing chart

CSFB have compiled data on the returns from these different asset classes over a 117 year period as the following chart shows;
The detail of how they arrived at these numbers can be found in the latest version of their Yearbook (see link below). What is interesting is that, historically, equities have outperformed all of the other asset classes they reviewed, and by some margin on a total return (income and capital) real (post-inflation) basis. We can analyse this a different way and look at average annual returns as follows;
Again, equities emerge as the clear winner. Some readers may be curious as to why property comes out at a lowly 1.3%. The answer lies in the fact that CSFB have taken an 11-country average. Strip out just the UK and the figure rises to 1.8% and look at the period 1995-2007 (the buy-to-let boom phase) and you get nearer 6%. Impressive stuff but, for reasons that I cover in a Killik Explains video entitled “Why Buy-to-Let is only for the brave” – I would be very wary of treating that one-off number as a guide to long-term future returns. In my view, property remains an asset that is best lived in, or enjoyed (in the case of say a holiday home) rather than seen as an investment unless you are an experienced landlord.
CSFB acknowledge that the returns from many asset classes may tail off in future years but they still expect equities to outperform pretty much everything else on a total return, inflation-adjusted basis.
No-one knows for sure what the future holds for any of these asset classes but the message from CSFB is pretty clear – if you want an asset that is relatively straightforward to own and manage and that stands a decent chance of beating inflation plus most other asset classes over the long-term, then equities have proved their worth and there is no reason to think they won’t continue to do so.

Is it all about the money?

Clearly many people own collectibles for reasons that have little to do with returns – art and antiques, for example, have an obvious enjoyment factor attached to them. For the very wealthy, there are some diversification benefits to be had too, both in terms of where their wealth is stored (a car, or a fine wine, can be kept almost anywhere in the world) and in terms of how they behave (the financial performance of violins and wine is, not surprisingly, different to bonds and shares). However, for most of us these assets are tricky to buy well and therefore the principle is simple – own alternatives to enjoy and use them, rather than for their financial potential and be wary of sales patter that suggests otherwise. These days I would say roughly the same about property – the heady days of the buy-to-let boom are clearly behind us, and the tax rules have swung firmly against landlords (again, see my video on this for more detail), so property should represent a roof over our heads or possibly, in a lucky few cases, somewhere to enjoy as a second family and/or retirement home, rather than an investment asset.

To sum up

When conventional assets become volatile in the short-term, some investors may be tempted to look elsewhere. However, as the slide below notes, my view is that most of us should neither run for the perceived safety of cash, nor should we be tempted by the more exotic end of the investment spectrum. Better to stick with what you know, and be patient.
To see more on the points I have covered here, please go to the CSFB Yearbook summary.
If you would like to discuss any aspect of this topic, please contact an Investment Manager.