Alternative sources of return

It’s normal in a low-return environment for clients to question the role of asset managers and to start investigating alternative sources of return. For the past decade, we have seen that when South African equity markets deliver disappointing returns, a surge of investors turn to offshore and unlisted markets to look for higher returns.

For investors seeking to repatriate their funds to meet South African liabilities, timing becomes crucial. The rand is exceptionally volatile, and it’s impossible to know which way the currency will move over shorter time frames. Depending on the length of the investment, these fluctuations in currency can often erode the outperformance in other markets. 

When it comes to alternative investments, the most popular have been hedge funds. This popularity has been driven in part by the promise of superior and uncorrelated returns. Although many have outperformed traditional equity and balanced funds over the medium term, it’s important to remember that not all hedge funds aim to outperform the equity market.

Some are better suited to give you downside protection and others aim to merely outperform cash. Financial advisors play a critical role in identifying investors’ needs, their risk appetite and time horizons, and then finding portfolios that match these more closely. 

I am always astonished at how many people quote gross performance numbers and use this as a justification for choosing a particular fund without considering the time frame over which the performance was delivered or the net effect after fees. What is even more astonishing is how few know the fees that they pay. Hedge fund managers have different skills from traditional long-only managers. They often charge higher fees and investors should ensure that their net returns (after deducting all investment-related fees) are in line with their expectations. 

Although hedge funds tend to be the better-known alternative asset class, there are many other alternatives. The unlisted market provides access to unlisted property, private equity, private debt, infrastructure investments, commodities and several structured products whose underlying assets can be composed of any combination of different assets.

These are often less liquid, and the returns aren’t published as widely or frequently. Investors need to have a good understanding of how long their capital can be tied up for and the impact on returns, should they need to exit earlier than anticipated. 

In South Africa, the last two years have also seen the launch of many new exchange traded funds (ETFs) on the JSE. These often require small investment amounts and can provide investors with access to various underlying asset classes. These can be accessed and traded on the JSE and provide daily liquidity and visible pricing. But investors who are used to accessing their investments via an investment platform now need to get used to having their investments held across different entities. For financial advisors, this requires a change in mindset, but we are starting to see a bigger take-up in these. 

The offshore market offers access to a significantly wider variety of alternative investments. Investors need to understand what they are investing in, the fees they pay for these products and the implications of currency and underlying asset class movements on their overall wealth and liquidity needs. And although alternatives may seem attractive, they too can disappoint at times. 

Partner with Equilibrium to explore alternative investments and multi-asset strategies that balance risk and returns for your clients. Combine global expertise, disciplined risk management and a client-centric approach. Email info@eqinvest.co.za or visit eqinvest.co.za.

Equilibrium Investment Management (Pty) Ltd (Equilibrium) (Reg. No. 2007/018275/07) is an authorised financial services provider (FSP32726) and part of Momentum Group Limited, rated B-BBEE level 1.