Diversifying investments by allocating funds to a mix of assets such as equities, bonds, property and cash, with different ranges of expected returns and risks, is a time-honoured approach to investing. Within this mix of assets, investors will typically have an index-tracking or ‘defensive’ core combined with smaller, more adventurous selections that aim for better returns than traditional asset classes.
Interestingly, an independent survey of UK IFAs conducted on behalf of JR Bloodstock Investments recently found that IFAs lacked knowledge of these non-traditional asset classes. The survey found that all (96.3%) respondents had clients with a portion of their portfolio dedicated to higher risk assets, and yet almost half (48%) of IFAs claimed their knowledge of alternatives was either “poor” or “average”.
Put simply, advisers lacked information about alternative investments such as fine art, fine wine and bloodstock and were unable to advise their clients in these areas with confidence, therefore, clients were potentially missing out on better returns.
For investors who are tolerant to higher levels of risk, alternative investments can diversify portfolios whilst optimising portfolio returns as a result of the above-average returns associated with this asset class.
Fine art is seen as a good choice for seasoned investors looking for decent returns in a gloomy economic climate. According to Deloitte’s Art & Finance Report 2017, the majority (six of the seven) of major art indices reported positive returns for the 12 months to April 2017, with impressionist art and contemporary art accounting for the highest annual returns of 10.5% and 7.45% respectively.
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In a similar vein, fine wine has outperformed traditional assets including gold, equities and property. An increase in demand from China is expected to boost global wine consumption further to 6.17% over the next five years, according to research by IWSR, a provider of data and analysis on the alcohol market.
According to Liv-ex, which tracks the wine market, over the last 12 months, the Liv-ex 100 index of the most-traded fine wines has risen 20%. However, it hasn’t all been smooth sailing as the index saw a 7% increase over five years after a fall in 2013.
Over the years, the horse racing industry has grown rapidly in the UK, and investors who select bloodstock tend to have a genuine passion for horses or just want to dip their toe in this type of investment. It’s generally considered a more adventurous allocation that remains unconnected to the stock market, which is desirable for investors wanting to insulate themselves against a stock market crash.
Investors also have the flexibility of spreading their investment across the entire portfolio of horses or focusing on one or a smaller number of horses. According to Weatherby’s, the range of individual prices makes it a risky investment, but volatility decreases with larger sums invested per foal.
In the purchase of above median priced foals (yearlings born between 2013 and 2017 sold as foals and yearlings the following year), the top 50% of foals provided investors with an average return of 37.88%, while the top 25% of foals returned an average return of 46.65%, says Weatherbys.
Investors considering bloodstock also have the option of taking advantage of attractive tax breaks through the government’s Enterprise Investment Scheme.
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