Do you remember the five traditional asset classes: cash, debt instruments, equity, property and commodities? Well, there’s more …
An asset that does not fall into the above categories is called an alternative asset. Alternative assets include private equity and hedge and infrastructure funds and they are all considered high-risk but also offer potentially high returns.
Ata wants to know…
Why should I invest in an alternative asset?
Again, it’s all about risk and returns. Alternative assets:
- Offer investors (like you or your retirement fund) the opportunity to generate optimal risk-adjusted returns. Come again? It’s complicated, but risk-adjusted returns refer to how the potential profit of an investment compares to the risks taken to achieve that return. An optimal risk-adjusted return is when an investor strikes a good balance between risk and return. This results in either beating the returns of traditional asset classes, or reducing the risk associated with them.
- Allow for the use of various strategies. In traditional asset classes, you can only buy and sell, so they only benefit when the economy improves. A skilled alternative asset manager can use different strategies to create returns even in poor market conditions.
- Allow investors to diversify their investments. Instead of putting all your money in one pot, rather spread it across various companies, regions, funds and even managers. If one of these factors to which you are exposed in a well-diversified portfolio performs poorly, the performance of the others should reduce the overall impact.
1. Private equity funds
Long term
Lower liquidity
Private equity is a broad, catch-all category for any equities (shares in companies) that are not publicly listed. Companies like MTN Group Ltd and Capitec are public companies whose shares are traded on the stock exchange – anybody can buy or sell shares in these companies.
A private company’s shares are held internally by a small number of shareholders. These shareholders can be individuals, trusts and/or companies.
A private equity fund typically comprises silent investors (called limited partners) who pool funds alongside an active investment manager (called the general partner) for a fixed period (e.g. ten years). A retirement fund can be a limited partner. The fund then invests in various private companies, works to increase the value of these companies, and sells these companies within a fixed period, whereafter the fund is closed, and profits returned to investors.
Private equity generally invests in established businesses with growth potential that are looking to raise capital to expand or improve operations. When investing in start-ups or early-growth companies we refer to venture capital investing.
15% of its investable funds
That’s how much your retirement fund is allowed to invest in private equity funds.
Ata wants to know…
Can I invest in private equity?
Only individuals and organisations with a lot of money can invest directly in private equity. The minimum required amount varies from R100 000 to R1 million. However, your retirement fund can invest in a private equity fund.
Nomnikelo example….
Some private equity funds aim to demonstrate social and environmental impact. These funds invest in companies with innovative products or services. For example, there’s a network of private schools in South Africa offering affordable, globally competitive education that was started with funding from private investors. The company started with one school in 2013 and now has 20 schools across Gauteng and the Western Cape.
2. Hedge funds
Long term
High risk
Hedge funds aim to generate high returns for their investors regardless of market conditions. So, even if the stock market is in a downturn, a hedge fund can generate returns. The hedge fund does this by using an array of complex investment strategies that allow it to take more risks than a traditional investor would take. In return, it can expect a higher yield.
Traditional funds typically generate returns by taking what is called long positions. They buy shares, hold on to them and sell them at an opportune time.
Hedge funds use the above traditional strategy as well as a range of non-traditional ones, including long and short equity strategies, market-neutral strategies, and leverage to generate returns.
10% of its investable funds
That’s how much your retirement fund is allowed to invest in hedge funds.
3. Infrastructure Funds
Long term
Lower liquidity
You are surrounded by infrastructure: the roads you drive on, the hospital your aunty works at and the pipe system that supplies water all fall under infrastructure. Even the cellphone tower and WiFi network that enable you to read this email are part of infrastructure assets. If managed properly, infrastructure is what makes a country work.
Given infrastructure’s long-term nature, investing in these assets can be appealing to retirement funds, particularly in times of rising interest rates and inflation. But the merit of infrastructure investment also extends beyond financial gain; not only does it provide an opportunity to invest in something that has a different risk-return profile to more traditional asset classes, but it also allows investing in and stimulating the country’s socioeconomic growth and development, which in return can reduce poverty.
45% of its investable funds
That’s the percentage of overall investment in infrastructure across all asset categories your retirement fund is allowed to make.
Ata wants to know…
How does one invest in infrastructure? Is it as easy as buying shares in a construction company, like Amandla Construction?
Not quite, the construction, operation and maintenance of infrastructure is a long-term process that involves many role players. Infrastructure funds can invest in any of these aspects, for example buying shares in a listed construction company that builds low-income housing. Or the fund can invest in the debt of healthcare service providers such as Netcare.
Sources:
Atleha-Edu – An introduction to infrastructure
thesait.org.za
smartaboutmoney.co.za
smartasset.com
This article was funded by Fairtree Asset Management.
