Many investors have become disillusioned with conventional investments. The prolonged bear market, the failure of with profits policies, underperforming pension schemes, and low interest rates have left many people disappointed. Alternative investments have thus become more fashionable.
It would be dangerous to assume that these investments are any more predictable than the conventional variety, as they also tend to be influenced by psychology and trends. But incorporating some alternative investments in a portfolio may help to provide greater diversification which can minimise overall investment risk. One rule of thumb is that having around 10 per cent of a portfolio in alternative investments is a good compromise.
Here are some of the most popular forms of alternative investment:
Antiques – The great advantage of investing in antiques is that you don't have to be an expert and you don't have to spend a lot of money. Almost any item could prove to be of value, especially if it is in good condition. But Peter Temple, the author of Superhobby Investing, recommends that if you are considering antiques as an investment it makes sense to specialise in an area that interests you, such as ceramics, glass, clocks or furniture; read up on the subject and talk to a few antique dealers in order to become as well informed as you can before you start.
When you start to buy, always choose the best pieces you can afford and beware of fakes. When buying from a dealer, insist on a receipt that describes and dates the item.
But you can still look out for bargains at small antique fairs and auctions. Mr Temple advises spreading your investment among a number of items and thinking long term. Returns vary widely. "Don't expect all your antiques to make you a fortune," he warns. And always remember to take out adequate house insurance.
Art – This is perhaps one of the most enjoyable forms of alternative investment as by its nature art is intended to be decorative and give pleasure. As with antiques, there are a variety of different areas you can specialise in, such as paintings, watercolours or sculpture, and there is also a choice of eras. Contemporary art is particularly popular at present thanks to high-profile collectors such as Charles Saatchi and events like the Turner Prize. It is also surprisingly affordable, with art fairs being held regularly where works of young artists can be purchased for just a few hundred pounds. But buying unknown artists is a gamble and even the works of recognised artists are not guaranteed to rise in price.
A recent survey by specialist insurers Hiscox based on the prices artists' works have reached at auction since 1998 showed that even the works of former Turner Prize winners do not necessarily rise in value. Though some artists such as Anish Kapoor and Gilbert & George have seen their auction values increase by more than 50 per cent, those of Chris Ofili and Rachel Whiteread have fallen by more than 20 per cent. And there is rarely any point in buying a piece of art which you actively dislike, just because you believe it will increase in value more rapidly.
Experts suggest that if you buy a range of works that you like by different artists, the chances are that some will appreciate in value. But, once again, the message is to think long-term.
Forestry - The big attraction of investing in forestry are the tax advantages. Yet at the same time there is also an obvious investment argument for buying a plantation of young trees that will grow, become more valuable as they get larger and which can then be harvested for timber. The UK's favourable climate for growing trees is also helpful although the ultimate returns will depend on timber prices which have fluctuated in recent years.
The tax benefits from forestry come in several forms. Income generated by sales of felled or standing timber is tax free and any increase in the value of standing timber is also free of capital gains tax. However, it is the exemption from Inheritance Tax that appeals to most investors. Providing the woodland is held for more than two years and has been managed on a commercial basis, it is eligible for 100 per cent Business Property Relief. But you should never invest purely for tax reasons, as the rules could change in the future. For many investors forestry is not practical anyway because of the relatively large amounts of capital required, starting at around £100,000 for a direct investment, although collective investment schemes are available which have lower minimum investment levels.
Gold – It is perhaps a misnomer to describe gold as an alternative investment since it has probably been regarded as a store of wealth longer than almost anything else thanks to its virtual indestructibility and scarcity.
Nevertheless despite these qualities the price of gold does fluctuate and between the late 1970s and its recent return to favour, its value declined significantly. Its present strength derives from its perceived role as a hedge against political uncertainty, the weakness of the dollar and the danger of a return to high levels of inflation. It is also particularly attractive in the context of portfolio diversification as its price normally moves in the opposite direction to equities and bonds. The two main ways of investing in gold are to hold it in physical form or to gain exposure through the shares of gold mining companies. The easiest way of owning the physical metal is to buy gold coins such as Krugerrands or Sovereigns which are available in a range of weights including a quarter, half or one ounce. Gold mining shares can be purchased through specialist investment funds such as Merrill Lynch Gold & General.
Hedge Funds – Although these funds are often described as alternative investments, they have become pretty much part of the mainstream investment scene in recent years as their apparent ability to make money during the years of the bear market has made them increasingly attractive to investors. Even so, they need to be treated with caution as they are unregulated. They are also very diverse with some using considerably more risky strategies than others. There are many different types of hedge funds, although they all basically have the same aim which is to make profits out of pricing anomalies while seeking to avoid losses. Some are focused on shares, others trade in bonds, currencies or commodities and they usually use derivatives and gearing to boost their returns. However, the plethora of hedge fund launches over the past few years appears to have led to a smoothing out of the very aberrations the industry seeks to exploit and the performance of funds generally has declined. High charges and funds that fail due to lack of support are other problems investors need to be aware of.
Wine – Impressively high returns are often quoted for wine investment and there are examples of some top wines, such as Bordeaux, where investors have made money. But there are also many vintages where gains have been extremely modest and wine investment schemes where unsuspecting investors have been overcharged by unscrupulous wine "investment" companies. An oft quoted advantage of investing in wine is that it is free of tax as it is classed as a wasting asset by the Inland Revenue, but a major disadvantage of many wine investment schemes are the associated costs of storage and insurance. Prospective investors would be well advised to visit this website which is dedicated to explaining the dangers of investing in alcohol before proceeding.
