Many expats contactmeand ask about the availability of ‘‘alternative’’ investments. Their aimis to diversify away from traditional asset classes in equities, commodities, bonds, exchangetraded funds and mutual funds.
There are a number of reasons why investors seek out alternative opportunities. Some prefer to own physical property, either individually or as part of a group; others like the fact that they have a physical asset of some sort. Many also like the idea that whatever happens to global equity markets, their specific holding will be unaffected, giving them true diversification.
Alternative investments are usually (but not always) non-correlated, which means that they have no direct relation to equity, commodity, bond or property markets. Let's consider some ideas that could be suitable for diversification of your nest egg.
FIXED RETURNS: Some investments offer fixed returns to investors over specific periods of time. These are usually financial funds that have a niche in their market. Initial investment amounts are relatively low and returns are above average. While there is higher risk than for a bank deposit, the returns are very good when compared to bank rates.
Invested into a fund, the returns are established at the outset so you know what to expect at maturity. Periods are also set at one to five years locked in, and as the fixed period lengthens, the rate becomes more attractive. Returns are available in most major currencies _ the table (top, right) offers some examples.
A limited number of fixed two-year funds are also available. These require a much higher financial commitment (A$500,000 or 15.9 million baht) but pay an even higher fixed annual return, as the table to the right shows.
STUDENT ACCOMMODATION: This asset class is a well known favourite among many investors. Known for steady returns, this is an asset related to property. However, it is specialist in that it invests in university accommodation units in popular tertiary education towns and cities across the UK. This is not property held for capital appreciation but rather an income-producing asset.
These units are now singly available to individual investors. You purchase the property or a number of property units and own an asset that will offer you capital appreciation. However, the main object is to primarily own an income-producing asset.
The units are let to university students and the income gives returns between 8% and 10% per year net of all costs. Further advantages are that the investment is hands-off as far as management is concerned. The developers or the universities themselves manage the properties, find the student tenants, collect the rents, maintain the properties, deal with building management and return you the net rental after costs.
This is a very good long-term income producing asset. Purchase prices vary from around 45,000 to 60,000 (2.22 to 2.96 million baht) and there is no financing available. Thus outright purchase is the only way to own these units at present.
SELF-STORAGE: This is another property-related idea with assets based in the UK. Self-storage has taken off in the last few years and there are a number of complexes with a variety of units of varying sizes. These are once again for sale and you purchase your own mixture of units on a leasehold basis. They vary from 2.3 square metres at 3,750, to 18.6 sq m at 30,000.
Once you own the units they are let through a management company, making this once again a hands-off investment as far as management is concerned. Returns will vary but average 8% to 12% per year, increasing the longer you own them.
Units can be resold back to the management company after six years at the same price at which you purchased them, making this similar to a bank deposit. However, you may also sell your units privately at any time on the open market.
As with student accommodation, why would you wish to sell these assets when they are producing valuable income for your future? As part of your succession plan, these units and student accommodation units can be left to any beneficiary you so desire.
LEGAL LITIGATION FUNDING: These investments have emerged from the legal systems in more than one country, based mainly on legal cases pitting David against Goliath, so to speak. Smaller organisations often have limited resources to fight genuine legal cases against giant organisations, which can drag out litigation for years. This means that smaller firms often either give up or simply do not bother.
A legal litigation fund is a financier of the legal costs of such cases. The fund assesses the viability of the case and, if positive, then agrees to provide financing to the plaintiff. In turn this loan is to be insured by the borrower, usually through Lloyds of London, the most respected insurance organisation in the world.
If the case is lost the insurance pays the loan back to the fund, making the capital of the fund protected. If the case is won then the loan is repaid plus a share of the damages awarded by the court.
Because the cases are assessed carefully there are usually more wins than losses and the funds make profits, allowing them to offer high fixed or variable returns, depending on the fund structure. In one example there is a minimum guaranteed return of 15% per year plus a bonus based on the cases won at maturity of the investment after a fixed period of three years.
This type of alternative holding is for the investor who wishes to make very good returns in the shorter term and redeem capital after three years. Thus this is more of a growth investment than student accommodation and self-storage, which are designed to offer steady income returns over longer periods.
Alternative investments certainly have a place in any overall financial life plan. For many they are already in use via the master investment vehicle already in place for you as an expat. If this is not the case, have a word with your financial adviser to find out why. Alternatively, why not have a financial health check with another adviser to see if you are getting value for money?
Next week we will look at further alternative investment ideas.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to email@example.com.