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

What Self-Directed IRA Investors Already Know: Alternative Investments are Mainstream

  |  By Curtis Glovier

As 2018 progresses, a new investment landscape is emerging: A stronger labor market, massive tax cuts and improved economic growth are stoking inflation, while interest rates are heading higher as the Federal Reserve purses a path of monetary tightening. The U.S. economy may finally be emerging from its post-financial-crisis cycle of too low inflation and too low interest rates.

What is also emerging is a new landscape for alterative asset investing. In the past 10 years, as the Fed’s accommodative monetary policy kept interest rates so low for so long, investors sought access to alternative investments to generate much-needed yield. They also sought alternative assets for diversification and their ability to help insulate portfolios from stock market volatility.

Today, investors are not just seeking alternatives to generate outsized returns. Instead, McKinsey & Co explains that the market meltdown caused by the financial crisis, which was followed by an extended period of market volatility and macroeconomic uncertainty, left its mark. Investors are now turning to alternatives for consistent, risk-adjusted returns that are uncorrelated to the market. They are also using alternatives to help with inflation protection and income generation.

Today, the result is that while investors are adjusting portfolios for a new landscape of higher interest rates and inflation, they may be better equipped to do so with improving access to alternative investments.

“Mainstreaming” of Alternative Investments

Nearly six years ago, McKinsey & Co. wrote a report called “The Mainstreaming of Alternative Investments.”[1] In it, McKinsey said alternative investments were not simply growing—they were becoming part of the investment management mainstream. McKinsey was referring to alternative assets such as hedge funds, private equity, real estate investments, commodities and infrastructure.

McKinsey estimated that global alternative assets under management more than doubled between 2005 and 2011 to $6.5 trillion, representing a compounded annual growth rate of 14%, far outstripping traditional asset classes. A big driver behind that trend was the adoption of alternative assets by retail investors.

“Long the preserve of institutional and high-net-worth investors, alternatives are moving into the U.S. retail mainstream as individuals, confronted with volatile financial markets and retirement savings gaps, seek wider options,” McKinsey wrote.

At the same time, financial advisors were starting to become more comfortable adding alternative investments to clients’ portfolios, and the alterative investment industry began creating more alternative investment opportunities for retail investors.

In a follow-up report released in 2014, McKinsey explained that structural forces were accelerating the adoption of alternative assets.

“The market meltdown caused by the global financial crisis, coupled with the extended period of volatility and macroeconomic uncertainty that followed, have left their marks,” McKinsey said. “Investors are now turning to alternatives for consistent, risk-adjusted returns that are uncorrelated to the market. They are also increasingly looking to alternatives to deliver on other crucial outcomes like inflation protection and income generation.”

A Glimpse into the Future Growth of Alternative Investments

Now, let’s fast forward. In its report, “Asset Management 2020: A Brave New World,” PwC predicts that by 2020 in some parts of the world, alternatives will effectively move into the mainstream and the term “alternative” may no longer remain in common usage.

Alternatives will simply become part of the investment toolset used by retail investors who are seeking strategies to generate returns while protecting against market volatility, the consulting firm predicts. PwC estimates that alternative assets will grow by roughly 9.3% a year between now and 2020, to reach $13 trillion.

Global Alternative Asset Projections for 2020

 

Self-Directed IRAs: Where Alternative Assets Have Always Been Mainstream

At PENSCO, we’ve been helping retirement investors hold alternative assets in their self-directed IRAs for more than 25 years. While the majority of IRA dollars are invested in exchange-traded assets such as stocks and mutual funds,[2] IRA owners can allocate their retirement assets beyond these traditional investments. The law only restricts IRA owners from investing in life insurance and collectibles.[3]

Many PENSCO clients choose self-directed IRAs for the specific purpose of investing in alternative assets—an option not typically available in IRAs offered by traditional banks or brokerages. Our clients' interest in non-exchange-traded assets is often driven by their expertise or personal knowledge in an industry, and the often-touted investment principle of “invest in what you know.” PENSCO clients invest in everything from real estate and private equity to promissory notes and timber.

According to our most recent client survey, the Top 3 reasons clients own alternative assets in their IRA are to access portfolio diversification, to invest in what they know, and to guard their retirement portfolio against market volatility.

For self-directed IRA clients, alternative investments have always been “mainstream.” At PENSCO, we’re proud to help investors achieve their retirement goals through the use of alternative assets, and we look forward to helping even more investors do the same over the next 25 years as the accessibility and adoption of alternative investment accelerates.

[1]The McKinsey report uses the term "alternatives" to include hedge funds, private equity and investments in real estate, infrastructure and commodities in a variety of vehicles including limited partnerships, fund of funds, managed accounts, mutual funds and undertakings for collective investment in transferable securities, or UCITs.

[2]ICI Research Report, "The IRA Investor Profile: Traditional IRA Investors' Activity, 2007-2015." Published June 2017. At year-end 2015, on average, equities and equity funds were 54.2% of traditional IRA assets held by individuals aged 25 or older.

[3]https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-investments

This 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.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.