Investment trends are shifting across the globe. In their quest to deliver risk-adjusted returns in increasingly volatile markets and meet shifting investment preferences among high-net-worth individuals (HNWI), wealth and asset managers are boosting alternative investment allocations.
According to the PWC Asset Management 2020 report, alternative investments, which include hedge funds and hedge fund-like products, private equity funds and real estate, will grow considerably faster and become more significant components within investment portfolios by 2020. The report predicts that alternatives, together with passive investments, will account for 35% of total assets managed by the global asset management industry.
Shaun Kotwal, Head of Wealth and Investment, South Africa for Standard Bank, affirms that alternative investments have become more prolific within local portfolios in recent years.
“While the search for yields has driven this trend globally, the need to diversify largely accounts for the rise in popularity for alternative investments in South Africa as asset managers look for ways to demonstrate alpha.”
Shifting preferences around an investment's potential impact on society or the environment have also grown significantly and have become a prolific driver of environmental, social and governance (ESG) and socially-responsible impact (SRI) investing.
Initially driven by millennial HNWIs and investors, wealth and fund managers embraced this investment approach to build loyalty with this emerging generation.
“This prolific generational cohort generally doesn’t want vanilla offerings. For instance, by investing in passive investments, they could buy the entire market, which can expose environmentally-conscious or socially-responsible investors to companies that may not align with their values or ethics,” explains Kotwal.
As such, wealth and asset managers have embraced this approach to meet shifting client investment preferences, while also establishing themselves as good corporate citizens.
“Creating opportunities to invest in alternatives locally and offshore is core to our vision of being a client-centric organisation. We, therefore, leverage partners that align with client preferences and solve for client needs to ensure these investors can invest in companies and products that are relevant and important to them.”
Importantly, it is now possible to invest in companies that in some way improve the world and yield returns.
“Numerous studies show that investing responsibly in this way does not imply that company profitability and share price performance are necessarily foregone,” states Winston Monale, Head of Absa Wealth Advisory.
“Companies that take the time to consider their impact on the environment and broader society, and the way they operate internally are often successful specifically because they pay attention to these factors, in addition to their financials. Investment managers can direct portfolio flows towards these types of assets, but individual investors can also mandate their investment managers to restrict their investment to a bespoke portfolio that builds heavily on ESG-cognisant companies.”
And in an environment where significant corporate governance issues have emerged among numerous listed companies, this trend increasingly transcends generations.
“We now see a cross-generational drive where it is no longer just millennials pushing ESG investing. Older generations also want to invest in ethical, transparent companies that do good and are making the world a better place,” continues Kotwal.
This, however, isn't always a simple proposition, elaborates deVere Group's international investment strategist, Tom Elliott.
“ESG investing, like other thematic strategies such as demographics and renewable energy, requires a subjective impute to effectively determine which companies offer suitable investment opportunities, which is more complex than many clients first assume.”
For instance, Elliott posits that if a large oil company invests billions of dollars into renewable energy, do ESG investors invest in it, even if it still derives the bulk of its current profits from fossil fuels?
“Once you remove sin sectors such as gambling, guns and alcohol, do you remove retail stores that sell them? For this reason, thematic funds are problematic from a retail client perspective. While an institutional client can work with a large pension fund or insurance company to create a bespoke portfolio that fully aligns with a client’s objectives, a HNW client will more often than not be offered an off-the-shelf fund that may or may not meet their understanding of what the fund invests in. The lesson in this regard is to always look under the bonnet before committing to an ESG approach.”