Investors are increasingly turning towards alternatives in this challenging environment. And as we continue to navigate global markets strongly affected by COVID-19, it seems their inherent constraints aren’t putting investors off alternative investments.
A report from Natixis analysed data from 2,700 financial professionals from across the world in April 2020. The results clearly show a strong feeling from investors that alternative investment strategies are increasingly attractive options. Particularly interesting is the fact that 68% of asset managers use alternatives and 54% are finding it an increasingly appealing option to generate yield. This sentiment from investors is likely to last throughout the coming year.
Which sub-categories within alternative investments are most popular?
Within the alternative investment category, just over a third of investors use real assets with a similar number preferring infrastructure. However, most asset managers surveyed say they expect their managed assets to increase by 2.5% on average over the next year. This is despite the extreme challenges caused by the pandemic.
When asked which asset classes they’re most interested in for the near to mid-term future, investors show a clear preference for infrastructure and private equity. Just under half expect these asset classes to grow strongly over the next five years. Real estate, not surprisingly, has less confidence surrounding it with just 14% earmarking it as an asset class set to perform strongly over the next few years.
In reality, it’s extremely unlikely that real estate and private equity will be unmarked by the pandemic. Short term, we’re seeing investment behaviours that are impacting alternative asset classes as people wait to see how the pandemic affects the rest of 2020. However, the future is still more optimistic than not for alternative asset classes.
There is definitely a perception specifically regarding real estate that its prospects are not good over the next few years. It’s important to remember that this could be influenced by the general feeling of caution that is holding some investors back right now. We just don’t yet know how far-reaching the pandemic will be, when a workable vaccine will be available and how countries will continue to be affected by looming lockdowns and safety measures. But during the years before the pandemic, we’ve seen rapid boosts in real estate business fund domiciles. For example, in Jersey, the real estate business has grown by almost a third since 2015.
Sustainability and ESG funds are under the spotlight during the pandemic
If we turn to ESG funds (environmental, social and governance), once again we can see there has been a rising interest from investors over recent years. This is because of the accelerating climate crisis and the switch of mindset towards investing in sustainable funds.
COVID-19 is also accelerating perceptions around corporate behaviour and investors can be the driving force for change. Statistics show that sustainable funds are outperforming non-ESG equivalents and have done so for around a decade. And during the global pandemic this year, there has been much less focus on risk factors in the rush to invest in sustainability. Alternative fund managers must prioritise governance of these funds to offset risk, and also analyse their substance to ensure the risk is worth taking for investors.
Around 75% of investors identify ESG factors as important within their portfolios. And within the alternative sector, more than half think that ESG is having the biggest impact on infrastructure. A similar number consider its impact on private equity equally significant, while ESG factors and their affect on real estate came in at 40%. The financial sector has an enormous opportunity right now to fund the transition towards zero global emissions. The target for the world is 2050, and alternative fund domiciles such as Malta, can play a significant part in moving towards this vital goal.
Alternative investment strategies in different global regions
Different regions naturally prioritise alternative funds in contrasting ways. While REITS and real estate are the most popular asset globally, they’re particularly important in North America and Asia. The US focuses on real estate and REITS as the number one alternative class, with investors allocating 54% of their alternatives to real estate. Similarly, in Singapore and Hong King, investors prefer REITS and real estate, with 39% and 44% allocated to each asset class respectively.
In Europe, the allocation of funds to alternatives is less simple to quantify. For example, in Italy the most favoured alternative investment strategy is infrastructure, while Germany prefers dedicating 61% of alternatives to real assets. And even though infrastructure has been hugely impacted by the pandemic, it only came third in the global rankings of alternatives.
Reports show that while there is an increase in interest for the alternative asset classes in the wake of COVID-19, not all of the overall investor aims are clear as yet. This appears to be at least partly because investors find alternatives too nebulous right now. It’s likely that more would implement alternative investment strategies if there was a clearer way to do so. There is a perception even from many financial experts that alternatives are too complex to adequately convey to clients.
The bottom line for alternative funds is always that investors must have total confidence in their asset managers. There is still typically a higher market risk, and it’s normally the case that they demand higher initial investments. However, investors increasingly need to diversify as they survey the difficult market situation caused by the pandemic.