Capital Markets Corporate

September 24, 2020

Holding out for a hero: can alternative investments save our pension pots?

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Investors, economists and bankers are predicting difficult times ahead for savers.

Last week, Tony James, vice-chairman of Blackstone, predicted a “lost decade” for stocks in the wake of coronavirus. At the same time, historically low borrowing rates have driven down bond yields as central banks try to boost economies for the uncertainties that lie ahead.

This presents a challenge for savers. Traditionally, retirement investors have adopted a 60/40 portfolio of stocks and bonds, with the majority in equities tracking economic growth and a significant minority in bonds acting as a stabiliser. However, with poor returns predicted in both components over the coming decade, investors increasingly need to look elsewhere to maintain inflation-adjusted returns.

For some yield-hungry investors, so-called alternatives (asset classes outside of stocks and bonds) might provide an attractive solution. Sophisticated investors, including the world’s largest pension funds and sovereign wealth funds, routinely invest in alternatives as a way of diversifying their portfolios and boosting headline returns. Such strategies include private equity, direct lending, real estate, commodities, foreign exchange, hedge funds and even fine wine or art.

While the potential for superior returns may seem attractive, there is no such thing as a free lunch, and these asset classes typically come with additional risks or restrictions that have made them only suitable for sophisticated investors with large portfolios. However with equity and bond returns faltering, demand for wider access to these investments is creating a wave of innovation as asset managers and intermediaries develop platforms and products that allow retail investors to access the same investments as their institutional counterparts.

However as competition increases between providers, managers must also think about how their communications must shift to capture the attention and trust of this new pool of investors, and should consider:

Education – Traditionally alternative investments have largely been unavailable or unsuitable for retail investors. As market innovation introduces new products to cater for this audience, communicators will need to educate investors about the nature of these investments, the risks involved and the return profile they can expect.

Standardisation – While institutions have the time and resources to analyse vast quantities of data to inform their investment decisions, retail investors require simple ways to assess and compare investments. As interest in alternatives from these investors grows, the Financial Conduct Authority is likely to intervene to ensure that consumers are adequately protected, products are suitable and the risks are made clear. Greater standardisation of performance data and risk level – common across retail investments – is a must.

Transparency – The rising popularity of impact investing and ESG have proven that today’s investors are becoming increasingly discerning about their investments not only in terms of performance, but about the practices and behaviours of those managing their money. Many alternative investments such as private equity have been notoriously secretive, but greater openness and transparency will be a must in attracting new investors.

 

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