Alternative investments entice more capitalists
AS global equity markets slow down, and developed economies maintain zero-interest rate policies while they recover from the financial crisis, investors are hard-pressed for attractive vehicles that will yield the kind of returns they have become accustomed to from listed shares.
The question for investors looking at future prospects when the equity market is expected to remain stagnant is: where to find returns? This, says Investment Solutions’ chief investment officer, Mark Lindhiem, lies in emerging-market bonds and, for those looking at higher rates, alternative investments.
Lindhiem says alternative investments are good as a source of additional returns and for portfolio diversification for investors who want long-term growth. “It makes sense from a broad diversification and uncorrelated [to market movements] assets perspective to use various sources of growth, whether they’re listed or alternatives,” he says.
The most popular types of alternative investments are private equity and hedge funds.
Private equity is better suited to long-term players. Investors can expect to be locked in for up to 10 years, the maximum time it takes to complete a project.
The private-equity industry has also outperformed the JSE. As of June 30 last year, the industry delivered an internal rate of return of 18.1% over 10 years while the JSE’s All Share Total Return index yielded 12.6%.
But even with these kinds of returns, institutional investors are cautious about alternative investments.
In 2011, the Pension Funds Act amended its alternative investment allocation allowance, bringing it to 10% from 2.5%. But Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association, says it has yet to see a “notable trend towards an increased allocation by South African institutional investors to private equity”.
A stand-out firm in the private equity space, with a 32-year track record to boot, is Ethos Private Equity. It manages the underlying assets of the listed entity Ethos Capital, and yielded a return of 21% over the past 20 years. In the same period the JSE All Share yielded a return of 15.1%.
Listing Ethos Capital, says CEO Peter Hayward-Butt, was about creating a liquid instrument for retail investors to get into private equity.
But marrying the long-term nature of private-equity investment with the short-term activity of the market has been difficult, says Hayward-Butt. “We do have a bunch of core shareholders who understand that it’s long term.”
South African hedge funds faced regulatory headwinds during 2015. While hedge-fund managers saw inflows of R1.4-billion between 2014 and 2015, the figure for 2015-2016 was down to R722-million.
Regulation was amended to classify hedge funds as collective investment schemes. This essentially opened the door for more retail investors’ hedge funds in the space.
It also meant hedge funds in retail operate within limits outlined by the National Treasury and the Financial Services Board.
Eugene Visagie, head of hedge
Some are venturing as far as the lesserknown private infrastructure and renewable sectors
funds at Novare, says the changes were beneficial for the industry, despite the drop in investment inflows. “The industry in South Africa has about R2-trillion in assets under management and we’ll probably see stronger growth.”
Hedge funds invest in the same instruments as unit trusts invest, but the mechanics of deriving returns from the market are different.
Unlike unit trusts, which rely on the growth of a share for value, hedge funds can bet on the growth and decline of a stock’s price. Hedge funds invest in listed stocks, but come with the benefit of leveraging against a decline in stock value.
As more investors turn to alternative investments, some venturing as far as the lesser-known private infrastructure and renewable sectors, Lindhiem urges prudence. “The slow growth and zero-rate [interest rate] policies are tailwinds that are pushing alternatives, but one has to be very selective,” he says.