Use Investment Products for Right Purposes

If a product is not used in the way it is intended, there’s a good chance it will harm your financial situation

Every time there is a personal finance crisis, it can be easily traced to products that did not do what they were intended to do, or had no place in the individual’s portfolio given their needs and goals. While the focus of investors is always on selecting the best performing stock or bond or mutual fund, the actual emphasis should be on selecting the right product for specific needs. The wrong use may have unintended consequences on the financial situation and put your goals and needs at risk of being unmet.

Insurance for saving tax

The purpose of insurance is to provide cover from risk of loss of income, or to protect the income from a large expense or charge. But most people turn to insurance for tax benefits in the form of deductions from taxable income for the premiums paid. “The main purpose of insurance is to provide financial security and adequate cover. If you are only looking at tax, you may actually end up buying the wrong product,” said Kapil Mehta, co-founder, SecureNow Insurance Broker Pvt. Ltd.

There is little thought on whether insurance is required, what type of insurance is required, and if they are getting the best cover possible for the premiums paid. Insurance policies taken haphazardly over the years just add to costs without getting the cover you may actually need. Insurance has to be planned and needs monitored with change in circumstances.

Otherwise there is a real risk that the premiums paid are not providing adequate insurance. The financial security of the household is traded for tax benefits which are not exclusive to insurance premiums. The same tax benefits can still be availed through investments and expenses tailored to the portfolio needs of the individual.

Tax-free bonds

Tax-free bonds provide tax- free interest income. It is a useful product for investors such as retired persons, seeking regular income with tax-efficiency. Along with other features such as the long tenure, high credit quality and stable interest income, these bonds tick many boxes for retirees. However, other investors should evaluate the availability of alternative investment opportunities which may meet their needs better.

Since there is no tax payable on the income, the rate of interest on these bonds are lower than other bonds of similar tenure and credit quality. For example, if a tax-free bond paid 7% interest income, it would compare with a taxable instrument paying 7.7% pre-tax for investors in the 10% tax bracket, 8.75% for an investor in the 20% tax bracket and 10% in the 30% tax bracket. You should evaluate comparable investment options to check for better returns.

An investor in the 30% tax bracket may find these bonds attractive since finding another investment with similar risk features that pays 10% pre-tax interest is unlikely. But an investor in the 10% tax bracket is likely to find other investments with better pre-tax returns comparable to the returns from the tax-free bonds. Moreover, these bonds typically have long tenures of 15-20 years. This means that the funds will be locked-up and may not be available if liquidity is a priority. Though the bonds are listed, liquidity is typically low, and selling it may not be easy, especially if interest rates are moving up.

Equity for short-term returns

Investing in equity is expected to provide long-term appreciation in value. It requires the ability to weather short-term volatility in prices and to monitor the performance of the company. Investors should be willing to hold on to the investments even if prices fall and allow the time for the performance of the company to reflect in the prices. It goes without saying then that funds earmarked for equity investments should be those that are invested for the long term. The risk arises when investors look to equity for better returns when they do not have the ability to withstand volatility.

If the tendency is to sell and exit as soon as markets dip then losses are inevitable. Similarly, if you are investing without giving enough time for market and economic cycles to recover from a downturn, then there is a possibility that funds may have to be withdrawn when prices are low.

It may be necessary to exit an investment if performance is not as expected. These decisions can either be made by investors or with the help of advisers.

Choosing safety

Low risk, liquid investment products are suitable for preserving the principal invested in the short term and to enable drawing from a corpus created for a goal. The returns from these investments are low. They are not suitable for holding funds for the long term because money loses value over time if the returns earned do not keep pace with inflation.

“Typically for a long term investment, you should look for a little high-risk product that has the potential to give you inflation-adjusted returns,” said Surya Bhatia, a Delhi-based financial planner.

By holding investible surpluses in low-risk products even when it is required well in the future, you are under-utilising the ability of funds to earn returns.

There is a good chance that the corpus accumulated is going to fall short of the need and put goals at risk. It is possible to earn better returns by taking on some risks that are acceptable to you. Some investors may be willing to give up liquidity and invest in real estate for better returns. Other investors may be willing to take on short-term volatility for long-term gains and invest in equity.

Taking some risks for better returns protects long-term goals from being underfunded.

Choosing products for bragging rights

From teak trees to Ponzi schemes and the more regulated hedge funds and private equity (PE) funds, investors have blindly invested in products that give them bragging rights. The promise of high returns and the dubious science behind some of the products allows them to hold forth to admiring listeners.

Typically no thought goes into the risks associated with the investment or their suitability. “Remember that products with returns that are too good to be true are usually a marketing gimmick. Always understand the product well before investing,” said Bhatia. Investors in products that they have little understanding about, such as PE funds, lose money when they find that they do not have the risk taking ability or the ability to tie up funds for longer periods to generate returns.

The role that a product can play in a portfolio is defined by its risk, return and liquidity features. Holding a product in itself is not a guarantee that it is going to do what it is supposed to do. How it is used will define that. Keep it simple and manageable. Having too many products leads to duplications and rarely serves any purpose. - livemint

Investing out of the box

Alternative investments, with low correlation to stocks and bonds, can be a good way to diversify

Most of us are familiar with the asset classes of cash, stocks and bonds. Outside these conventional assets is a whole universe of alternative vehicles (alternatives) which include tangible assets such as art, antiques, coins, wine and forestry, as well as financial ones like hedge funds, commodities, private equity and derivatives.

Most alternatives are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity.

They usually perform with low correlation to stocks and bonds, which explains why pensions and private endowment funds may allocate a small portion of their portfolios to alternative investments such as hedge funds.

In addition, alternatives improve diversification, which is useful in avoiding losses during more volatile market phases.

Within alternatives, do note that there are regulated and non-regulated ones.

Most financial experts would caution that alternative investment in unregulated products is not for the layman. This is because investors will forgo the protection afforded under the laws administered by the Monetary Authority of Singapore (MAS).

Investments outside the jurisdiction are all the more complicated because you then have to consider the legal systems operating in the country in which the investment is made, whether you understand them and whether they give you adequate protection.

Despite the risks involved and partly due to the lacklustre performance of traditional investment assets, investors continue to rush into alternatives that are accompanied by potentially beefier financial returns.

But no matter how exotic and attractive the investment is, you should still do your due diligence.

For instance, find out if the company has a good reputation of running the business.

What are your investment objectives, horizon and risk tolerance? What is your means of recourse if the investment goes bust?

The Sunday Times highlights three non-regulated alternatives.

AGARWOOD AND OUD OIL

Agarwood is a dark resinous wood found in Aquilaria trees which is highly prized and sold worldwide. Popular by-products include oud oil, incense, beads, handicrafts and other precious artefacts.

In the wild, agarwood is formed after the tree has been attacked by a fungal infection or physically harmed by wild animals or lightning. However, the infection has only a 1 per cent to 7 per cent chance of occurring, and when it does, the dark resin can take 50 to 100 years to form in the trunk, branch and roots, said former forex trader Benjamin Song, who set up One Plantation Capital (OPC) in 2014.

That means finding naturally produced agarwood is extremely rare. So, OPC inoculates mature trees - which it leases or bought from plantations in Cambodia and Laos - that are at least five years old to ensure the production of the agarwood.

Firms offering such investments, such as Asia Plantation Singapore and Tropical Forest Venture (TFV), have sprouted in Singapore. The former has been placed on the MAS alert list while TFV investors have filed police reports after the firm folded.

How it works:

The earlier agarwood investments provide investors with saplings that require a waiting period of up to seven years before profits are seen.

An investor paid about $230 per sapling or $550 per semi-mature tree. In return, he could expect potential returns of three to seven times when the saplings matured in six to seven years.

At OPC, the minimum investment amount is $10,000 for 10 semi-mature aquilaria trees. The firm then inoculates and manages the trees for 31/2 years before harvesting them. OPC will assist to sell the trees at $1,700 each, which means investors receive $17,000 for a $10,000 investment or 170 per cent total returns.

OPC offers an insurance cover - 130 per cent of the purchase price - which protects its investors in case of default. The performance insurance bond is a blanket (rather than an individual plan) cover whereby OPC is the insured and its corporate and individual investors are the beneficiaries, according to Mr Song.

Arranged by Hong Kong-based insurance broker SAG Brokers, the insurance is from Indonesian insurer Asuransi Asei. The insurance applicant is another entity, Malaysia-based Gold Assurance Asset Management Company.

CROWDFUNDING

Crowdfunding, or peer-to-peer lending, refers to a process, usually via an online platform, where people who need money can meet those who have it. It involves raising money from many people looking for ways to earn interest on their savings, to fund a business project or venture.

Crowdfunding has grown in popularity in recent years, mainly fuelled by the tightening in lending criteria of traditional lending sources during the global financial crisis.

Over the past year or so, crowdfunding platforms of various sorts have mushroomed in Singapore.

There are at least 13 companies with a presence here - from more recognised names such as MoolahSense, CapitalMatch and CoAssets, to newcomers like EziFund, a real estate crowdfunding platform which made its debut last month.

For now, the MAS regulates only securities-based crowdfunding platforms, which have to obtain a Capital Markets Services licence in order to operate here and service mostly accredited investors.

Crowdfunding platforms such as MoolahSense and Funding Societies do not come under regulation, and are open to the wider public.

How it works:

Typically, a company puts out a sum that it needs to borrow, and the platform, after carrying out its own screening process, lists the request as a campaign. The firm also states what it is willing to pay in interest.

Investors sign up and state how much they are willing to lend and what they expect to be paid.

The campaign ends when enough investors have pledged their cash, which gets transferred to the company. The firm then repays the investors through fixed monthly payouts.

For investors, it is a great way of generating yield on small amounts, as little as $100 a pop. Interest rates typically hit anywhere between 10 per cent and 15 per cent, and the tenure of the loan tends to be short, as little as six months.

For firms, they do not necessarily pay cheaper interest rates but it may mean easier access to funding.

Investors should note there is no guarantee loans will be returned. Many firms using crowdfunding sites tend to be small, and even some of the bigger names may not be in the best of financial health.

LANDBANKING

Landbanking involves firms buying large plots and subdividing them into smaller parcels, making it easier to sell to investors as they can be priced at affordable levels.

How it works

Firms typically sell undeveloped plots, usually rural land overseas, which could potentially be sold later for a profit.

Investors are often told the land is on the outskirts of a city where urban development is likely.

When development plans are drawn up, investors can then sell their plots to developers willing to pay higher prices for the land.

It looks a winner, yet the pitfalls are plenty as many who had invested in Singapore-based Profitable Group would attest.

The firm had offered investors an opportunity to invest in plots of land in the United Kingdom, luring them with promises of a fixed 12.5 per cent return within six months. Two directors of Profitable Plots have been jailed for a total of 15 years for cheating investors.

Despite the bad publicity, some people have profited from their landbanking investments, albeit usually after a long wait.

Recently, the Walton group of companies - which focuses on land in North America - went a step further and made its investment products syariah-compliant.

This is done through endorsement by the Financial Syariah Advisory and Consultancy. Pergas Investment Holdings assisted in this as it has a dedicated advisory focusing on structuring investments to align with syariah principles.

Mr Gary Tom, president Asia of Walton International Group, said it is a significant initiative as some of the clients are Muslims who can now be assured the products are syariah-compliant. It also provides an opportunity for Walton to offer the products in the Middle East.

The minimum investment at Walton is US$10,000 (S$13,800) per unit and the size of the land varies depending on the properties or projects.

For Walton pre-development land investment's fully exited projects, the weighted average internal rate of return is 12.32 per cent, and the returns ranged from 4.75 per cent to 28.51 per cent. To date, the average duration of fully exited projects is 8.71 years, with a range ofabout two to 19 years.

Walton has more than 42,000 customers in Asia, of which over 21,000 are from Singapore.

PROPOSED RULES TO PROTECT INVESTORS

The MAS has said that it will be regulating investment schemes such as gold buybacks and collective landbanking. The proposed changes are expected to be tabled in Parliament this year.

The proposed regulation covers collectively managed investment schemes that are in substance similar to traditional regulated investment funds such as mutual funds but do not pool investors' contributions.

Traditional collective investment schemes involve investors pooling their funds to invest in an asset or a group of assets, while unregulated collectively managed investment schemes require each investor to buy his own direct stake in the asset, such as a small plot in a large tract of land or even specific trees on a plot of land.

If investors do not have day-to-day control of the property and the scheme is managed as a whole like a collective investment scheme, it is likely to fall under the proposed MAS regulation.

Under the proposed rules, some schemes may no longer solicit funds from the public but can do so only from investors who are deemed more sophisticated.

A full assessment of how a scheme is operated will need to be done in order to determine if it would likely fall within the proposed MAS regulation.

In addition, the authorities are looking at more regulations in the crowdfunding space.

INVESTOR ALERT LIST

Meanwhile, the MAS investor alert list provides a listing of unregulated entities that may have been wrongly perceived as being licensed or authorised. The central bank assesses public feedback such as consumer complaints as well as documentary evidence on the entity before placing it on the list.

The list, which can be found on the MAS and MoneySense websites, acts as an early warning alert to investors. It is not exhaustive and is periodically updated. The fact that a company is not listed does not mean that it is credible.

So consumers must exercise caution when dealing with all unregulated entities, not just those listed.

The list includes such firms as Efzinitus Capital, which offered an investment scheme with monthly returns of 8 per cent, Shenton Wealth Holdings, Shenton Holdings and Singliworld. - straitstimes.com

Design Your Portfolio to Fit You

Your investment portfolio must reflect what your money needs to do for you. If it doesn't, you may be taking too much risk with your investments or, on the other hand, you may be missing out on important growth. Either way, you and your family are the losers. Make sure your investment portfolio doesn't reflect a "one size fits all" mentality.

Asset allocation is the most important aspect of your investment strategy. It dictates the amount of dollars invested in cash, stock, bonds, real estate, or other types of investment vehicles. Your personal situation, and not that of your neighbor, determines your asset allocation. The way your money is invested should be customized for you and based on your needs.

Asset Allocation Rules

Rule #1:  Do not invest in the stock market unless you anticipate leaving the funds invested for at least five years, preferably longer.

The stock market will go up and down. This is a "fact," not a hypothesis. The history of the market shows us that money invested for a least a five-year period has a high probability of reflecting an increased value at the end of the period relative to the beginning. For a ten-year period, the probability of a gain is even greater. There are no guarantees, but investors who have the ability to stay invested over a long period of time have been rewarded for their patience.

Rule #2:  Funds that you need within a five-year period should be invested in the fixed income arena. 

With today’s low interest rates, it is difficult to think about investing in fixed income. However, that is exactly what you need to do if funds from your investment portfolio are needed to pay next year's college tuition or replace an auto in three years. Those dollars should be invested in vehicles that are expected to maintain a stable value even if the investment return is less than you would like.

Dollars needed in the next five years should not be subject to the risk of the stock market. Savings accounts, money market funds, and certificates of deposit are the most stable investments. Corporate bonds and government bonds such as Treasury bills will remain fairly constant, but can have some fluctuation in value when interest rates or economic conditions change. 

Determine the Appropriate Asset Allocation for You

The appropriate asset allocation will protect you in a down-market and assist you in an up-market. The asset allocation used in your portfolio must be based on your particular situation and not that of a co-worker or relative. The allocation must reflect your anticipated use of the funds. 

Situation: Married with two children

If you are age 35 and married with two children, ages 8 and 10, you need to save for college education, your retirement, and perhaps an addition to the house. Your 401(k) or IRA funds can be invested in the stock market since it is likely that you will not need these funds for at least twenty years or longer. The college funds can be invested in the stock market until the children reach high school, then you will want to consider a change in the allocation to invest those dollars needed in a fixed income vehicle. The money you are saving for the house addition next year must definitely be in fixed income assets only.  There is nothing more disappointing than to postpone a project because the stock market went down!

Situation: Retired married couple

If you and your spouse are age 65, your portfolio will likely be very different from the 35-year-old couple discussed above. If you plan to withdraw $30,000 per year from your investment portfolio to supplement your pension and social security, you should have at least $150,000 (five years of distribution needs) invested in fixed income. Depending on the size of your portfolio and your overall financial situation, you may want a greater amount in fixed income to provide more stability in your portfolio. 

Change your Asset Allocation with your Situation

As you move through stages of your life, your asset allocation needs to be revised to reflect your needs. Today's asset allocation should be based on your need for funds over the next five to ten years. As your future needs change, your asset allocation needs to be adjusted. "Single" with no family responsibilities to "married with children" requires a change in your asset allocation. Likewise, making a decision to retire in five years versus ten years requires a close review of your total investment portfolio.

Summary

Don't get caught thinking you should invest your funds in the same manner as your neighbor. To successfully meet your financial goals, your asset allocation must reflect your unique needs. Think it through yourself or work with your financial planner or investment advisor to assure the most important aspect of your investment portfolio is appropriate for you. - insideindianabusiness

10 Simplified Investment Management Principles

Keep these tips in mind for a greater chance of investment success.

Investors need to know the landscape so they can make good decisions with their money.

To help navigate the investment landscape and financial markets, we share 10 simple investment management principles with our clients. While past performance is, of course, no guarantee of future results, the following principles have historically correlated with a greater chance of investment success.

Diversify. Build a well balanced, low cost, globally diversified portfolio based on your risk tolerance, time horizon and investment objectives. Diversification means allocating capital in a manner that reduces exposure to any one asset class (stocks, bonds, cash, etc.) or particular risk. By investing across a variety of asset classes with, ideally, a low correlation of returns, you may have a portion of your portfolio that performs well in a good economy while another portion of your portfolio may perform well in a down economy. In doing so, you may offset the potential impact of a poor-performing asset class on your overall portfolio. Diversification will not ensure gains or guarantee against losses, but can better help to manage risk.

Stay the course. Maintain a written investment policy statement and consistent savings discipline to invest regularly during good markets and bad. Easy to say, more difficult to execute; investors love to chase returns of higher risk investments during good markets and scurry to conservative investments during down markets. Unfortunately, this often means buying high and selling low. Having a written investment discipline helps to stay the course and stick with your plan to better achieve your goals.

Invest for the long term. Time and compound returns are a powerful combination for potentially growing your wealth. Albert Einstein, who studied the mysteries of time and space, called compound interest the most powerful force in the universe. For example, a portfolio that earns a 6 percent annual rate of return will double in value roughly every 12 years and quadruple in value roughly every 24 years.

Focus on what is in your control. Amidst volatile markets, focus on what you can control by sticking to your investment plan created during calmer times. Run a Monte Carlo analysis, which simulates up and down markets of various lengths, intensities and combinations to create a realistic assessment and probability framework for achieving your goal(s).

Rebalance regularly. Regular rebalancing institutionalizes buying low and selling high by reallocating your portfolio to its original investment mix. Rebalancing may also serve as a risk management mechanism. Give your portfolio regular checkups to ensure that your target investment mix aligns with your risk profile.

Maintain liquidity. Maintaining sufficient liquid reserves may help you stay calm on the emotional roller coaster of financial markets. By setting aside emergency savings that will cover your short-term expenses, you can keep a cool head and better manage your stress during bouts of market volatility. Knowing that you have your short-term needs covered may help some investors sleep better at night.

Accept normal market volatility. Accept that market declines and fluctuations are a normal and expected part of investing and, historically, the trade off for potential long-term growth. Short-term market volatility is the friend of the long-term investor as it creates lower asset prices for purchase. To paraphrase Dean Witter, It takes courage to be optimistic about the future when pessimism abounds, but when the future is again clear, today's bargains will have vanished.

Invest incrementally. Often referred to as dollar cost averaging, invest incrementally over full market cycles rather than attempting to repeatedly time a market bottom. It is better to be generally right by investing consistently over time, rather than precisely wrong by investing all at once.

Noise is not a plan. It is imprudent to let the noise and hype of short-term events, covered aggressively in media headlines, influence long-term investment decisions. Plunge. Soar. Optimism. Panic. Greed. Trigger words and sensational headlines may cause investors to make irrational decisions, but market timing is folly.

Monitor your behavior. Investor behavior and corresponding adjustments to your asset allocation (strategy to balance risk versus reward) drive potential investment returns and impact your ability to achieve your goals. As Warren Buffett says, "The most important quality for an investor is temperament, not intellect." - money.usnews

3 Reasons to Start Investing Now

In order to secure your financial future you should start investing right now. It doesn’t really matter how much savings you have in the bank or if the economy’s doing well. Your age isn’t even of great consideration because you can never be too young or too old to invest. The most important thing is that you start investing today.

Delaying your investment plans until it’s convenient or when you feel it’s the right time may put your future at risk. You should commit to investing to achieve financial freedom. Here are three reasons why now is the best time to do it.

1. You want a comfortable retirement. One of the many reasons why people invest is that they want to live comfortably when they are no longer productive. Come to think of it, you can’t expect yourself to put your retirement on hold until you are in your 80s because you can’t afford to stop working. You owe it to yourself to prioritize and stick to your retirement plan. Invest early to ensure a comfortable and stress-free retirement.

2. You want to give your nest egg ample time to grow.  Having money in the bank is not enough to ensure financial security. You need to invest a huge chunk of your savings for it to yield significant returns. Start investing today rather than doing it later because you’re likely gain more if you start building your wealth earlier. Even if your investment grows at a slow yet steady rate, you’ll still accrue bigger, long-term investment returns.

3. You want to give yourself enough time to recover during financial setbacks. Keep in mind that investing is not without risks. When you invest, you acknowledge the possibility that things may go south and you may end up losing some of your money or all of it. When you have more time on your hands, however, you can still set things right and recoup your losses.

Time is of the essence when it comes to investing. Act on your investment plans right now so you may reap the benefits later. - streetwisejournal

Got Deep Pockets and Stout Heart? Try Alternatives

Novices, beware. Such investments help diversify risks but are highly speculative

Alternative investments, once the exclusive domain of institutional investors, are increasingly gaining traction among more sophisticated high-net-worth investors.

Eager to chase returns uncorrelated to the market, these investors are starting to turn to alternatives to diversify risks, to protect against inflation, generate income and cushion rising interest rates.

According to a 2014 McKinsey report, investors have been tilting money in recent years into alternatives with global assets hitting an all-time high of US$7.2 trillion (S$10 trillion) in 2013.

The report also said that global alternatives under management are growing at an annualised pace of 10.7 per cent, twice the growth rate of traditional investments.

But alternatives, which broadly comprise hedge funds, private equity and real estate-related investments, are not without risks.

They are highly speculative long-term investments that are less transparent, less liquid and less regulated, and with less frequent pricing and reporting.

They are, therefore, more suited for sophisticated and experienced investors willing to bear the risks, including the loss of the entire investment.





HEDGE FUND

S Hedge funds - unlike mutual funds which focus mostly on stocks and bonds - invest in a wider and more diversified pool of asset classes and financial instruments such as currencies, commodities and derivatives.

They also adopt less conventional strategies not normally available to mutual funds such as leveraging with borrowed money.


As their name implies, hedge funds are useful as a defensive investment because they aim to hedge against downside risks and generate consistent returns regardless of market conditions.

For example, as they are not constrained by an index, hedge funds are in a better position to take advantage of market dislocations such as uncertain interest rate environments in the markets that they trade.

This helps to shield investors from downside volatility, diversify risks, preserve capital and potentially increase upside returns.

From an investor's point of view, one of the most distinguishing features of hedge funds is being able to access strategies and markets that may be outside of the range that the investor may have access to. For example, they can "short sell" assets and mitigate losses when markets fall by borrowing and selling overvalued stocks, then buying them back later when prices drop.

Conversely, they can take a "long" position when the market rises by purchasing undervalued stocks which are likely to increase in value later.

They can apply unique techniques such as merger arbitrage by buying the securities of the company for sale and simultaneously selling those of the acquirer during mergers and acquisitions.

Hedge funds can also provide access to distressed securities, usually deeply discounted, during company bankruptcy.

As prospective returns from equities and bonds decline, and volatility remains elevated, we are overweight in hedge funds in portfolio allocation, in particular, multi-strategy hedge funds as they have the ability to switch between different investment strategies using the same pool of capital.

They respond to market movements by allowing portfolio managers to shift risk and allocate capital away from less attractive strategies to those that offer superior opportunities.

Investors should be aware that hedge funds do not have the liquidity of mutual funds as they typically allow redemptions only on a monthly or quarterly basis. They are also less transparent than traditional funds in the strategy and positions they take, and pose leverage risk which may result in loss of investment.


PRIVATE EQUITY

Private equity, regarded as a type of alternative asset class, is capital invested in companies that are, in most cases, not publicly listed on a stock exchange.

Typically, private equity firms will raise working capital for the company for various reasons such as restructuring, expansion or business re-engineering.

Wealthy and institutional investors will be invited to put their money into a fund set up and managed by the private equity firm.

Private equity investments are generally illiquid and require long holding periods of eight to 10 years or more.

This is because the private equity firm will invest in the company over the first half of the term and then aim to sell or exit for a profit over the second half.

This horizon enables the portfolio manager to time his entry and exit, and not be subject to the market gyrations faced by listed companies.

In return, investors can be rewarded by the illiquidity premium.

They will receive the return of capital plus a capital gain when the private equity firm exits the portfolio company. In some cases, a current yield may also be paid along the way.

We focus on private equity with exposure to emerging markets and energy sectors for reasons of falling entry prices and strong historical performance respectively.

REAL ESTATE-RELATED INVESTMENTS

Investors are most familiar with real estate, be it acquiring a piece of residential property or accessing it through listed products such as real estate investment trusts (Reits).

With soaring property values and huge demand, fund managers can provide investment access to real estate deals sourced from around the world that typically are the preserve of institutional investors.

For instance, there is rising interest from fund managers in commercial buildings with high-calibre tenants that offer the potential to deliver competitive returns from different geographies and markets. This can increase diversification and returns to the wider portfolio.

Also, since the 2008 financial crisis, as traditional bank lending has contracted, there has been a shift towards speciality financiers providing debt and loan facilities to industries such as real estate that are looking for fresh capital.

This may give investors a slightly diversified form of high-yield income - through funds participating in this restructured real estate debt - rather than simple capital gains from bricks and mortar.

Because of improving economic cycle and financing conditions in the euro zone, we are positive about the real estate-related investments in that market.

In conclusion, the alternatives market is beginning to compete with traditional asset classes for funds at a time when investors are growing in sophistication and seeking ways to increase the resilience of their portfolios and fortify against market swings.

With their growing popularity, it is not surprising that the McKinsey report projected that alternatives could comprise 15 per cent of global industry assets and produce up to 40 per cent of industry revenues by 2020.

That said, only experienced high-net-worth investors with the appropriate risk appetite and financial sophistication casting sights at the longer-term liquidity and investment horizon should consider alternatives, but not without first considering their personal circumstances, consulting their professional advisers and understanding the product features and risks. - straitstimes.com

Alternative ways to make your money work for you

Alternative investments are no longer just for the wealthy.

Savers who are tired of the paltry interest rates on offer from banks in the United Kingdom and elsewhere are pouring money into alternative investments.

Crowdfunding and peer-to-peer lending sites, which offer returns as high as 8 per cent, have been a big beneficiary of these funds, and regulations have been tightened up in recent months.

Mondo Bank, a digital “challenger" bank that attracted investment from the Tech City chairman and venture capital investor Eileen Burbidge, raised £1 million (Dh5.3m) through crowdfunding in just 96 seconds. Property Partner, another crowd funding website, offers returns of 13 per cent a year by allowing people to invest in residential buy-to-lets, without having to buy a whole house.

Stock market volatility, of which there has been plenty this year, is also another reason why investors like alternatives. Traditionally, many people look to alternative investments and the first port of call is often the safe haven of gold.

Other investments such as fine art and classic cars could increase in value but will also give pleasure.

If you are not sure that your parking is up to the responsibility of a classic car, you can also invest in a classic car fund. One of the most recent to be launched was the PHD Classic Car Fund in 2014, which gives investors the chance to drive one of its portfolio of cars for up to 50 days a year for a £200,000 investment. Each car in the portfolio is valued at more than £300,000.

Collectible items such as original film posters, first edition books, comics and magazines and many coins are likely to increase in value over a 10 to 30 year time frame.

Coins are one of the least widely collected investments, according to Knight Frank, yet have set record prices at auction recently. For example, an Edward VIII 1937 gold proof sovereign sold for £516,000 two years ago, a world record price for any Royal Mint coin produced in the UK. The had coin previously sold for £40,000 in 1984.

Jewellery is likely to at least hold its value but some pieces – particularly by classic designers such as Cartier and Tiffany – can become much more valuable than the precious metals and stones they are made off.

Wine is another investment that many people in the UK enter into, and there can be returns of 13 per cent on vintage wine. However, those who are serious about selling cases will want to get them cellared by a professional. Fine wine – like a classic car – is considered a “wasting asset" under UK tax rules, so any gains do not attract capital gains tax. 

Mini-bonds or loyalty bonds are another form of alternative investment that are popular with customers and savers.

Lancashire Country Cricket Club raised £3m to build a 150-bedroom hotel in 2014 by tapping its members and supporters for money, promising a 7 per cent equivalent return over five years.

The Jockey Club has also raised £25m from a mini-bond that tapped racing fans.

Adrian Bell at the stockbroker Canaccord Genuity attributes the rising popularity of company mini-bonds to the increasing regulation of other securities.

The incentives linked to many of the bonds – such as “cricket credits" to be spent on membership or match tickets in the case of Lancashire – are definitely part of the attraction.

But the fun of the incentive, should not cloud investors’ thinking on the risk inherent in the investment. - thenational.ae