In the current climate of low interest rates and high valuations, UK investors are looking for new ways to get returns in less liquid areas that are relatively cushioned from yo-yoing equity and bond markets.
This mood music has pushed almost half (43 per cent) of UK investors to consider alternative assets to make their money work harder during the pandemic, according to new research by NexGen Cloud.
A fifth of UK investors’ portfolios are already more heavily weighted towards so-called alternative assets rather than traditional publicly traded equities and bonds, with 30 per cent crediting them for enabling to invest in more specialised fields that they “know more about” or are “passionate about.”
Of these asset classes, real estate – with its lower yields and inflation resilience – came out on top as the most popular choice, included in the portfolios of 17 per cent of UK investors.
Defying scepticism, cryptocurrencies came in joint second with collectibles (the likes of art, wine and classic cars) gracing the portfolios of 14 per cent of UK investors.
Although ESG and impact investments currently only appear in 11 per cent of UK investors’ portfolios, ranking them sixth, the research echoed what we know about investors’ appetite for sustainable investments.
ESG investments were the top choice going forward, with over a fifth (21 per cent) of investors considering adding them to their portfolios in the next year.
It comes after the latest data from funds network Calastone found that ESG funds have accounted for around three fifths of inflows into active funds since November, driven by a combination of increased investor conscience and also business savvy.
“Alternative investments have become more and more popular in the UK over the past decade, with investors increasingly willing and able to access markets they may not have before,” said Chris Starkey, founder and director of NexGen Cloud.
“The current record-low interest rates and volatility caused by the pandemic has only accelerated this trend, resulting in more investors looking for new ways to making their money working harder,” he added.
Areas of opportunity
Low yields have drawn investors into real estate during the pandemic, but the increased attention on the sector has created a lot of price pressure – meaning tactical choices are key, according to Zachary Gauge, head of real estate research at UBS Asset Management.
“A lot of the investors that are looking to diversify away from fixed income and are piling into real estate are looking for very similar products: core assets, long term yields and secure tenants,” Gauge said. “But that’s pushed a huge amount of capital into a fairly small amount of the market.”
Retail parks, with their low rents and robust trading during the pandemic, are yet to attract much capital, despite more attractive income yields than the offices and logistics accumulating capital.
Student accommodation development, according to Gauge, is another area to watch, after a huge increase in UK students going to university which has offset worries about lack of foreign students.
“Real estate does hold that good space between equities and bonds and gives an opportunity to investors to really take a structural view of the market and study how people are living, working and spending money,” he said.
“If you can get those trends right, you can develop or own assets that intuitively grow in value and benefit from those long term demographic trends.”