Alternatives are on the rise: Why it may be time to consider adding alternatives to your clients’ portfolios
Alternative investments are increasingly mainstream and on investors’ radars. Connection Capital found in June 2020 that 87% of investors were planning on maintaining or even increasing their allocation to alternatives, and Preqin estimates that alternative assets under management could grow to $17 trillion 2025 from $10.7 trillion in December 2020. As an RIA, it is important to understand the risks and opportunities alternatives present in order to advise your clients on which investments align with their investment needs.
Several trends drive investor interest in alternatives
The rise in investor interest is driven by a confluence of trends. First, despite stock market returns north of 50% over the past year, many investors are worried about the market outlook going forward. Stocks continue to hit record highs, although they appear overvalued by some metrics, and many investors wonder whether valuations are sustainable. On top of that, the past 18 months have delivered record levels of market volatility.
A second factor driving the trend is today’s low interest rate environment. Traditional safe haven investments such as high-yield savings accounts, CDs and bonds are returning next to nothing, and the 10-year Treasury yield currently stands around 1.31%, which is less than inflation. Combined with pessimism around the stock market, this is bad news in the long term for the traditional 60/40 portfolio. Although 60/40 portfolios are up over 30% year-over-year, in the years ahead investors will need to branch out in order to continue achieving superior returns.
A third factor driving interest in alternatives is the role the 2012 JOBS Act had in democratizing alternatives. Previously, only accredited investors were able to access most alternative investments. The Act broadened access to a wider universe of retail investors and led to a flurry of activity in the alternatives space. A wide range of crowdfunding and other technology-enabled platforms created new opportunities for investors to access a much broader range of alternative investments, including venture capital, private equity, private debt, and farmland, which previously had only been accessible to institutions and the extremely wealthy who could afford the high minimum investment thresholds and increased diligence costs.
The key takeaway here is that alternatives are here to stay.
The benefits of adding an allocation of alternatives to your clients’ portfolios
Alternative investments are more than just hype – they have many characteristics that make them an attractive choice for augmenting your client’s portfolio. Three attractive characteristics of alternatives are returns, diversification and income.
First and foremost, alternatives are a way for you to help your clients achieve alpha. For example, between 1992 and 2020, farmland outperformed both the stock market and gold. Adding an allocation of farmland to a traditional 60/40 portfolio increased returns over this time period from 6.9% to 7.5% and reduced volatility from 10.5% to 8.9%.
Second, alternatives are uncorrelated with the stock market, making them an excellent choice for increasing the diversification and reducing the overall volatility of a client’s portfolio. Farmland is uncorrelated with all major asset classes, including stocks, bonds, commercial real estate and gold. Notably, the NCREIF farmland index has experienced only two quarters of negative returns since 1992.
Third, many alternative investments provide passive income, which can be an excellent way of augmenting and diversifying your clients’ streams of cash flow. This can be particularly beneficial for retirees or others on a fixed income. For example, in addition to price appreciation, farmland delivers passive income in the form of periodic rental and crop payments. For this reason, the right alternative investment can provide a higher-yielding substitute for bonds in a clients’ portfolio.
For all these reasons, it is worth considering an allocation of alternatives. Morningstar recommended that an allocation of 3% – 10% to alternatives was appropriate for retail investors. Depending on your client’s risk tolerance, investment horizon and financial goals, alternative investments can provide an excellent mix of above-market returns, diversification and passive income that cannot be achieved through traditional public market investments alone.
Technology-enabled platforms make alternatives more accessible than ever
Despite the benefits alternatives have to offer, many RIAs cite hurdles in providing alternative strategies to their clients. One barrier is lack of knowledge. According to some investment experts, around “67 percent of advisors say lack of understanding is one of the main reasons they don’t invest more heavily in alternatives.” The alternative investment space is extremely diverse, and a broad understanding of alternatives is important for figuring out a bespoke investment strategy for each client. For example, farmland investing shares some benefits with other real estate investment strategies but also differs in certain crucial ways. There are also nuances within farmland as an asset class, with crops varying greatly in terms of risk and cash flow profile.
According to a report by PFI Advisors, other RIAs cited hurdles such as high minimum investments, the increased cost and complexity of diligencing alternative investment strategies, a lack of transparency around the market, and difficulty in accessing quality managers. For some RIAs, the breadth of options in the alternatives space was overwhelming.
It is here that the boom in technology-enabled alternative investment platforms can enable RIAs to better meet the challenge of maximizing returns for clients. For example, FarmTogether’s platform seeks to take the mystery and guesswork out of farmland investing. Our learning center provides a broad range of materials to better educate investors and advisors about the benefits and nuances of farmland investing. The platform provides users with high-quality investment opportunities that have been carefully diligenced by FarmTogether’s team of veteran investing professionals. You can feel comfortable that your clients will have access to the highest-quality farmland investments. Even better, investors can get started with an investment as low as $15,000, meaning that you can find the right farmland investment for all of your clients.
Help your clients leverage the benefits of alternative investments
Alternative investments can form a key component of a comprehensive investment strategy by providing above-market returns, improving diversification and providing passive income. As they become increasingly mainstream, it is more important than ever for RIAs to have a solid grasp of several alternative asset classes. Platforms like FarmTogether can enable you to meet your fiduciary duty and provide high-quality alternative investments to your clients.
To learn more about farmland as an investment opportunity, click here. To lean more about the FarmTogether platform, click here.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.