One new area that investors might want to diversify into is listed alternative assets.
What are listed alternatives?
Listed alternatives comprise a range of asset classes and sub-sectors. Infrastructure can encompass renewable energy, energy storage, schools, hospitals, roads, data centres and mobile towers, while property can be as diverse as healthcare facilities, social housing and student accommodation (see example below).
Why listed alternatives?
Listed alternatives often have different revenue drivers to equities and bonds, meaning lower sensitivity to the global economic cycle.
- The ups and downs of economic growth have less bearing on their revenues, so they can be better-placed to deliver RESILIENT INCOME in more challenging economic environments. With different risk and return drivers, many listed alternatives have the potential to produce positive growth AND income in a variety of economic scenarios.
- The revenues of listed alternatives are often linked to inflation, either directly through government subsidies, such as for renewable and social infrastructure, or indirectly. Inflation can be positive for revenue growth. In contrast, traditional assets tend to provide limited INFLATION PROTECTION.
- Typically listed alternatives offer HIGHER RISK-ADJUSTED RETURN potential to equities and bonds (see chart 1). Generally they have been, and are expected to remain, less volatile and provide higher returns. Further, these assets are listed on exchange – so investors can buy and sell them on a daily basis. There is no capital lock-up.
- In addition, many listed alternatives have LOW CORRELATION to traditional assets such as equities (see chart 2), helping investors to diversify risk. It enables them to become less reliant on global equities to generate growth. In this way, diversification can help to reduce portfolio volatility and downside risk.
Here we highlight five alternative asset classes available through listed investment companies:
Physical assets such as roads and bridges (hard infrastructure); and services that support economic and social needs (soft infrastructure). Projects often benefit from subsidies and inflation-linked revenues (such as renewable energy), offering some shelter from economic cycles and volatility.
Listed private capital
Investing in underlying assets not traded on a public exchange, including in private companies (private equity); in private debt, where investors lend directly to borrowers; and in listed managers of those assets. Listed private capital offers exposure to a range of assets with strong return potential.
Selected areas of the property market including healthcare social housing, student accommodation and residential. These more specialist areas can provide resilience against downturns in the economic cycle.
Includes royalties for healthcare, music and precious metals. Royalties are payments to the owners of assets. Some firms invest in debt backed by royalties’ income. This sub-sector includes litigation finance – firms earning income by financing commercial litigation cases.
A portfolio of largely mezzanine and collateralised debt backed by income-generating assets, typically offering higher yields than traditional credit but with comparable risk. Investments that have a variable rate structure are less sensitive to changes in interest rates.
Bloomberg data are for illustrative purposes only. No assumptions regarding future performance should be made.