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PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

3 Reasons 2014 Could be “THE” Year of Alternative Investments

Penny in a Piggy Bank

  |  By Joseph Adams

Each February, I like a do a quick review of the major headlines and market outlooks from the past couple of months, just to see if there are any interesting investment strategies or ideas for the year that I may have missed.

This year, I’m noticing a recurring theme: “2014: The Year of the Alternative Investment.” “The Case for Alternative Investments in 2014.” “Pension Funds to Go After Alternatives in 2014.” You get the picture.

To be honest, this heightened interest in alternative investments isn’t exactly “news” to me, and I’m not just saying that because I work for PENSCO (a self-directed IRA custodian where clients can invest in alternatives using their retirement accounts). Investor demand for the alternatives category – an umbrella term for non-exchange traded assets such as private equity, real estate and commodities – has been steadily growing for the past several years.

But what makes this an intriguing story right now is that current market and economic conditions, combined with the increasing accessibility of alternatives, could indeed make 2014 “the year of the alternative investment.” Here are a few reasons why:

  • Good income is (still) hard to find.With another yield-challenged year ahead of us, many strategists continue to suggest certain alternative investments as potential solutions for income investors. “The key to enhancing your income sources without taking an inordinate amount of risk is to carve out a small slice of your portfolio for avant-garde, dividend-paying sectors,” says The Street. They suggest alternatives such as master limited partnerships (MLPs), preferred stocks and real estate investment trusts (REITs).

    MLPs in particular have seen a surge in popularity over the past year due to their attractive yields and potential tax benefits. Despite the potential headwinds of a future rate rise, The Street points out, “history shows that while MLPs sometimes take a short-term hit during times of big rate moves, these products may perform well longer term.”

    And for those who feel MLPs have run their course, the BlackRock 2014 Outlook offers another income-oriented alternative for 2014: infrastructure debt, which they say can offer “stable cash flows with fat fixed yields (characteristics once found in investment grade debt).”

  • Diversification is king.2013 was a banner year for equities, but can we expect a repeat performance this year? With no crystal ball to clue them in, many investors are preparing for an eventual downturn just in case, by adding alternatives to their portfolios. “Investors worried the US rally is growing long in the tooth are looking at alternative investments as a way to diversify and potentially make money in a market correction,” says The Street.

    CNBC agrees: “By investing in the stock market, but also purchasing investments that protect against sudden, large declines in the market, this strategy has actually produced better annualized returns since inception than the S&P 500, with a fraction of the risk.”

    Of course, as BlackRock points out, “not all (alternatives) are effective diversifiers.” They like market neutral hedge funds and strategies focused on “hard” assets like infrastructure.

  • Demand is high.

    Institutional investors were early adopters of alternatives, but market conditions over the past few years have them using more alternatives than ever. According to a recent Morningstar/Barron’s report, “among institutions, the number of ‘heavy users’ of alternatives seems to be growing. More than 20% of institutions, compared with 17% last year, said they expect alternative investments to make up more than 40% of holdings over the next five years.”But as individual investors become increasingly aware of the potential benefits of alternatives, demand has increased in the retail space, as well. Morningstar says “only 4% of advisors said their typical client had no money in alternative investments, down from 17 percent in the 2008 survey.” This increased demand has led to what some are calling the “mainstreaming” of alternative investments – and should continue as more and more investors familiarize themselves with the category.

 

The PENSCO blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.