Alternative Investments and Price-Value Relationships

Alternative investments to equities both illustrate the universality of value investing principles and reinforce the key element of relating price to value.  Below summarizes some alternatives to equities and their price-value relationship.

Straight Bonds:  Duration and coupon drive valuation and price.

Convertible Bonds:  Equity component drives variability, some price-value divide.

Real Estate:  Buyers intuit a price-value divide when seeking ":good deals".

Precious Metals:  Supply-demand imbalances drive price-value divide

Other Collectibles:  Personal attachments drive price-value divide


Value investors habitually relate price to value.  This attitude applies not only to equities, but also to all other investments.  The habit of relating price and value comes more naturally for certain assets than others.

Real estate is a good example.  People seem intuitively able to understand that they might be getting a "good deal" on real estate, but many exhibit less intuition when thinking about common stock investments.  They do likewise with consumption goods such as cares and loans or leases taken to finance their purchase.

Markets for some alternatives show how price-value differences are less likely to appear.  Bonds are a good example.  These instruments have features such as duration and interest rate that common stocks lack.  This makes it easier for investors to agree on their value and produces prices more reflective of value.  The absence of these features on common stocks suggests reasons to believe that price-value differences are likely to occur on common stocks.

in·tu·i·tion 

Noun The ability to understand something immediately, without the need for conscious reasoning. A thing that one knows or considers likely from instinctive feeling rather than conscious reasoning.

Synonyms insight - instinct

How to Invest Your MONEY: 30 Key Personal Investment Opportunities

1. Annuity
2. Bond, Corporate (Interest Bearing)
3. Closed-End Fund
4. Collectibles 
5. Common Stock
6. Convertible Security
7. Exchange-Traded Funds
8. Foreign Stocks and Bonds
9. Futures Contract on a Commodity
10. Futures Contract on an Interest Rate
11. Futures Contract on a Stock Index
12. Government Agency Security
13. Life Insurance (Cash Value)
14. Money Market Fund
15. Mortgage-Backed (Pass-Through) Security
16. Municipal Security
17. Mutual Funds (Open End)
18. Option Contract (Put or Call)
19. Option Contract on a Futures Contract (Future Option)
20. Option Contract on an Interest Rate (Debt Option)
21. Option Contract on a Stock Index
22. Option Contract or Futures Contract on a Currency
23. Precious Metals
24. Preferred Stock (Nonconvertible)
25. Real Estate Investment Trust (REIT and FREIT)
26. Real Estate, Physical
27. Savings Alternatives
28. Treasury Securities (Bills, Bonds and Notes)
29. Unit Investment Trust
30. Zero-Coupon Security

Now, super rich look at alternative asset classes

CHENNAI: Equities, mutual funds and FDs can longer satiate the super rich. Instead, they are channelling their wealth into start-ups, unlisted companies, realty-focused private equity funds, gold ETFs and art. The burgeoning breed of HNIS, or wealthy people, are exploring and investing in a whole new range of asset classes.

According to a recent report by Karvy Private Wealth, the wealth management arm of the Karvy Group, individual wealth in India stands at Rs 73 lakh crore and this is expected to double to Rs 144 lakh crore within the next three years. While the bulk of investment is still in direct equity (31.1%) and fixed deposits and bonds (30.3%), private bankers said there is a growing preference for alternative investments. Most HNIs have ridden on the mutual fund and equity wave as they went into the market early. They are now looking at different asset avenues, said Nitin Rao, executive vice-president (private banking group and third party products), HDFC Bank.

HNIs are classified as people with an investible surplus of at least $1 million . Over the years, the profile of HNIs has also rapidly undergone a change.

• Older HNIs largely comprised members drawn from business families. 
• Today, nearly 45% of private clients are first-generation entrepreneurs or self-employed, 15% comprise professionals, 20% are senior salaried executives, 5% are young celebrities, with property inheritors accounting for remainder.

"We believe that individuals in India are under-invested in alternative assets. We believe this will be a huge area of investments in the next decade. PE, real estate funds, realty investment trusts and global investments are expected to be popular among HNIs," said the Karvy report.

Even with debt and equity, HNIs are exploring options that are offshoots in such classes. "They are looking at investing in unlisted equities, PE funds and in debt," said Rajmohan Krishnan, senior V-P, Kotak Wealth Management.

Read more: Now, super rich look at alternative asset classes - The Times of India http://timesofindia.indiatimes.com/business/india-business/Now-super-rich-look-at-alternative-asset-classes/articleshow/6680959.cms#ixzz11R1yExbE

Exotic plays for brave investors

Tired of considering the same old investments? We look at some of the more unconventional choices.

By Paul Farrow and Emma Wall
Published: 12:16PM BST 11 Aug 2010

Comment

Vietnam is 'one of the most promising countries in the world', according to one analyst

Investors who are fed up with dismal returns from traditional markets are making steps to invest in more adventurous areas. Popular funds include those that invest in Latin America, Russia, India, gold and commodities.

Rebecca O'Keeffe, at Interactive Investor, said: "Our investors continue to look for more aggressive growth opportunities."

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Selftrade, the broker, said its clients were now investing more "adventurously" in gold and silver exchange-traded funds (ETFs).

So if you are in an adventurous mood and are prepared to lose the shirt off your back if it all goes pear-shaped, then check out these four areas attracting interest from seasoned investors. Wealth warning: the usual caveats of getting advice apply.

VIETNAM

Three years ago, Vietnam was one of the best-performing stock markets in the world and numerous funds were launched to provide access for foreign investors.

However, the euphoria proved short-lived and in 2008 Vietnam was hit by a double crisis. Firstly, it was forced to raise interest rates sharply to choke off a surge in inflation and this was followed by the global credit crunch, which hit exports and foreign investment. Unsurprisingly, the country's stock market fell sharply and investors suffered.

Charles Cade, an analyst at Numis, said: "There was a bounce-back during 2009, helped by a domestic economic stimulus package. However, foreign investors have been reluctant to venture back into the market and have focused their attention on China instead. In our view, though, it is time to take another look. Vietnam remains one of the most promising countries in the world."

Mr Cade sites low labour costs and a young, growing workforce, a growing entrepreneurial culture, and significant natural resources – including agriculture, timber and oil – as reasons to be bullish.

While Vietnam is not on the radar of many financial advisers, Mick Gilligan, from stockbroker Killik, is a fan. He reckons that Vietnam is like a smaller version of China in that it has a centralist government keen to embrace a capital market approach.

"The equity market is still in its early stages of maturity, but it has exciting prospects. Our favoured routes would be FTSE Vietnam ETF [db-X Tracker] for those looking for market exposure and liquidity. VinaCapital Vietnam Opportunity fund also looks interesting and it currently trades on a 40pc discount to net asset value," he said.

MIDDLE EAST

These so-called frontier markets are the BRICs of the future, with burgeoning industry and a population with a thirst to better themselves through education and Western-style material acquisitions.

Sam Vecht, co-manager of BlackRock's Global Emerging Markets fund, considers Panama, Saudi Arabia and Qatar to have just as much investment potential as their better-known peers. "These countries are often ignored, but this is because of a lack of analyst and media coverage, rather than a lack of opportunities," he said.

However, before you rush to sign on the dotted line for a frontier fund, be warned. With great returns come great risks. Three years ago, New Star launched its Heart of Africa fund with the hope of making the most of the untapped potential of the likes of Zimbabwe and the Democratic Republic of Congo. Liquidity issues forced the fund to close in 2008 with investors losing 66pc of their money.

Many frontier markets are fraught with political unrest, while corporate governance, although it is improving, is another concern.

In March, Barings launched its Middle East and North Africa (MENA) fund to tap into its resource-rich economy.

But Hugo Shaw at Bestinvest, the financial adviser, issued a word of warning. "Returns may be high, but you should only invest in frontier markets if you are able to stomach a roller-coaster ride in price movements," he said.

Mr Shaw advised investors to consider investment trusts as a safer way to get exposure to frontier markets. They are better suited to less-liquid markets because the manager is not a forced seller or buyer. "Closed-ended investments, such as investment trusts, are better placed to deal with such issues, and Advance Developing Markets and Genesis Emerging Markets are two good examples," he said.

PLATINUM AND PALLADIUM

All talk of metal investing in recent months has focused on the haven and inflation hedge of gold. Yet other metals, notably platinum and palladium, are gaining interest from investors.

Two main factors drive these metals to premium prices: demand from the Asian market and their use in catalytic converters. Half of all cars need these converters, ensuring that demand remains strong.

Prices of these white metals has been falling of late, leaving analysts wondering whether a buying opportunity is around the corner. The reason for falling prices is the slowdown in the auto industry. Car sales in the US are down 11pc and plunged 25pc in Japan, while car production in China is down 6.9pc.

However, many analysts anticipate a strong resurgence in platinum and palladium prices towards the end of the year – buoyed by an anticipated recovery in sales in China.

"Prices have recovered from the 2008 trough, but by no means as far as they could rise as the wheels of the global economy begin to turn again and I think platinum has a greater upside potential than gold," said James Cook, product manager at Fidelity International.

"Long-term demand is assured by developing nations who will become the biggest new car buyers in the world, 2009 marked the sales of new cars in China outstripping those in the US. The now unstoppable drive to cleaner technology in cars means whatever size the Chinese car fleet grows to, it will need to be powered by cleaner cars with platinum a key raw material."

Adventurous investors can get exposure to platinum via an exchange-traded fund.

AGRICULTURE

Several fund groups are beginning to promote agriculture as an alternative to traditional equity funds.

One of the most notable recent launches is BlackRock's BGF World Agriculture fund, managed by Desmond Cheung and Richard Davis. The company outlines investment opportunities in the move in emerging markets farming away from pastoral to arable and a growing global population.

The sector has delivered positive returns over the past year. The average return for agriculture funds, based on £1,000 invested 12 months ago, is £1,150. The best performer is Allianz RCM Global Agricultural Trends, which has risen 20pc in the past year. The fund is almost entirely invested, having less than 1pc in cash, with the majority of the fund in North America. The fund is also invested in Singapore, Malaysia and Chile.

Meera Patel, of Hargreaves Lansdown, recommended investors do their homework when investing in agriculture, as one fund can differ very much from the next. Sarasin's AgriSar fund invests in the entire agricultural supply chain, from grain to supermarkets. This means that although you may miss out on large surges, there will be a much smoother growth.

"We would recommend Sarasin's fund to someone just looking to invest in agriculture for the first time," she said.

http://www.telegraph.co.uk/finance/personalfinance/investing/7930993/Exotic-plays-for-brave-investors.html

Thinking of alternative investments?

18-08-2008: Thinking of alternative investments? by Aisyah Lam

http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_d3e80bfd-cb73c03a-df294000-e5fea09d#

There has been a lot going on in global financial markets. With volatility likely to continue, and general consensus of a slowdown in major economies, the question most frequently asked is: Where and what should I invest in next? Given the uncertainties and increasing challenges, investors are exploring various investment options to stay ahead of the curve, and opportunities to improve long-term returns.

This article will cover some of these investment choices known as alternative investments, which complement traditional investing and have been attracting a growing interest from institutional, high net worth individuals as well as retail investors.

Alternative investments

Investments in our market comprise mainly equity, bonds and property. These are traditional investment vehicles. Over time, with innovation and increased understanding of the markets, other alternatives have started gaining popularity.

Many alternative investments with minimal correlation to traditional benchmarks have proven to be resilient in volatile markets and uncertain economic conditions. This formula has worked well supporting the investment rule of thumb — portfolio diversification — and increasing resilience against risks.

An understanding of alternative investments may be helpful in supporting more informed investment decisions, for exposures to other than just equity and bond markets.

Alternative investments include familiar products such as private equity, real estate and structured products; whilst examples of more sophisticated options include managed futures and hedge funds.

In contrast to traditional investments, alternative investments seek absolute performance and depend on advisers’ skills for performance. They may use leverage and have historically low to moderate correlation with market indices. Typically, it is not as easy to liquidate such investments as there may be fixed periods ranging from monthly to yearly, and may include possible lock-up periods. Charges may generally be higher and in the form of performance fees.

Traditional investments, on the other hand, would seek relative performance where returns depend primarily on market performance. They have historically high correlation with market indices. These forms of investments generally do not employ leverage, offer daily liquidity and charge fixed management fee on assets under management.

Why invest in alternative investments?

Alternative investments offer opportunities to qualified investors to diversify their portfolios by combining alternative strategies with traditional holdings, aimed at generating steady returns and preserving wealth through fluctuating market conditions.

Over the years, while the risk-adjusted returns in the stock and bond markets have become less, modern investment instruments such as alternative investments have helped realise consistent returns over time, as they tend to move in opposite directions to traditional strategies.

Alternative investments have helped preserve opportunities for positive returns even during times when stocks and bonds under perform.

Types of alternative investment

1. Private equity

Private equities are privately negotiated deals that are invested in mostly non-public companies that may be in different business phases or categories. This would include start-ups, companies in the development stage or expanding, a buyout situation, perhaps restructuring. Investments could be in form of venture capital (VC); leveraged buyouts (LBO); mezzanine or distressed debt.

Private equity managers could be stand-alone or fully integrated organisations that may take an active role in a target company’s management with the objective of creating value during the period of investment, and to exit profitably.

2. Real-estate investment

This is probably one of the most commonly known forms of alternative investing. Real-estate investment would have an internal rate of return objective although there is no guarantee of the return objectives being met. Leverage could range from 0-75% and the investment has low correlation with market indices.

There is less volatility compared to equities and fixed income as investments are in physical assets, though investments would be relatively illiquid. Real-estate investment could offer an advantage in the form of potential inflation hedge.

Real-estate investment can be public and debt-based like commercial mortgage-backed securities (CMSB) or public and equity-based like real-estate investment trust (REIT) stocks or real-estate mutual funds. Other forms of investment include private and debt-based like mezzanine debt or senior loans or private equity like open and closed-end funds.

Investors should note that commercial real estate can offer portfolio diversification as historically it has low correlation with other asset classes and has provided steady returns over the long term. It has proven performance versus other investments. It is different from family homes and there is risk/return trade-offs in various real-estate investments.

3. Structured products

Of late, structured products have become popular in the market as it can offer the security of principal protection with the opportunity of further income upside. Structured products can be performance-linked, leveraged/arbitrage products and principal protected.

Performance-linked products may be linked to the performance of a basket of assets such as stocks, bonds or hedge funds; or to indices like Morgan Stanley Capital International (MSCI), FTSE or S&P Indices. They are usually illiquid and have no leverage.

Principal-protected products offer capital assurance with potential upside from returns linked to performance of predetermined assets. Principal protection is only valid if the investment is held till maturity.

Leveraged/arbitrage products are investment products that generate returns based on the spread between assets and financing costs. They normally have limited liquidity, with potential for high returns, which comes with association of high risk.

Structured products can be customised to fit the unique requirements of individual investors and can offer potentially higher yields than of market norms if certain scenarios materialise. The underlying structure could be in forms of various exposures to diversified market sectors — they could be offered in one packaged security or maybe repackaged as credit-enhanced/principal-protected products to be managed actively with the aim of improving the risk/return profile of the investment.

4. Managed futures

Managed futures are essentially an alternative investment strategy that offers access to global futures market via professional money managers called commodity trading advisers (CTAs).

CTAs use trading strategies and money-management techniques to attempt to achieve profits and control risks. They trade in global markets including futures, options and forwards on traditional commodities like gold, crude oil, soybean and crude palm oil. They also trade in financial instruments such as the US Treasury Bond, British Long Gilt and NYSE Stock Index as well as currencies, which include but are not limited to the euro, Japanese yen, Czech kroner and Thai baht.

As in any other forms of investment, there are risks involved. Due to the use of leverage, a small change in market price of a futures contract can produce major gains or losses for a managed futures contract.

Nevertheless, from January 1994 till June 2008, managed futures generated an average rate of return of 7.25% compared with the S&P 500 of 8.65%, Nasdaq of 12.6%, Global Stocks of 7.49% and Global Bonds of 7.83% (Credit Suisse Tremont Hedge Fund Index LLC, Lipper as at July 2008).

Given the sophistication of this investment class, fees are higher than that of traditional funds.

5. Hedge funds

Hedge funds aim to make absolute returns regardless of market conditions. They offer greater flexibility than traditional investment managers and can go long and short on stocks. Use of derivatives and leverage is allowed and normally hedge funds impose a higher minimum investment amount. Performance fees are charged based on returns generated by the managers.

Hedge funds do have liquidity restrictions and are moderately regulated with limits on capacity.

Here are several facts about hedge funds.

i) In the early 90s, the hedge fund industry was dominated by high-risk, aggressive macro players. It has since evolved significantly in terms of AUM as well as sophistication, and in 2007, there were over 10,000 hedge funds with many more diversified strategies. Hedge funds do not apply the same investment strategies as other funds.

ii) Hedge funds are not only for bear markets as they seek low or negative correlation to traditional long-term investing.

iii) Hedge funds do not always lack transparency. Whilst skill-based investing may be less transparent than traditional investing, some hedge fund managers make transparency their selling point.

Generally, hedge funds offer opportunity to improve portfolio efficiency with enhanced returns while potentially reducing risk. It also advocates diversification with low correlation to existing asset classes and the chance to participate in investments managed by top-rated hedge fund managers, using different strategies and employing a wide range of instruments.

A fund of hedge funds is a multi-manager hedge fund that has dedicated and expert teams of managers. The assembling funds of hedge funds create a significant advantage over private investors as it offers the opportunity of exposure to a diverse set of strategies in a single investment.

Multi-manager funds have access to the best managers, who often close quickly and limit allocations to long-term clients who buy and hold. Very importantly, fund of hedge funds offers diversification, as it minimises risks by combining funds and strategies.

Minimum investments are lower than single-strategy funds, hence reducing the strain of high-value investing. Transparency is not an issue as they are able to obtain and interpret complex information, which could be a challenge to private investors.

In a fund of hedge funds, strict due-diligence processes facilitate identification of quality managers, while continuous monitoring and reviews are enforced.

Portfolio construction and readjustments of positions are made throughout the life of the portfolio. These efforts are resource intensive and could not possibly be conducted by a private investor.

It is important for investors to read, research and understand the features, liabilities and benefits offered by alternative investments such as private equity, real estate, structured funds, managed futures and hedge funds. A well-diversified portfolio, which incorporates some form of alternative investment, could help increase returns and lower portfolio volatility overall.

Aisyah Lam is the head for wealth management products, Citibank Berhad