SIMON BROWN: Exploring the alternatives

On the whole, South African investors have a lot less exposure to the alternative investments sector than their international counterparts, who have up to 20% of their portfolios invested in alternatives.

But the sector has been getting a lot of press recently. And, in his new book, The Holy Grail of Investing, Tony Robbins even goes so far as to suggest that this is where you will get outsize returns in the years and decades ahead.

This sounds like hype, but as the local alternative market matures we’re seeing a lot more opportunity for investors in this space.

But first, what are alternative investments? Simply, anything that’s not listed on an exchange. Private equity is probably the best known, while private credit is gaining popularity, and renewable energy projects are also getting a lot of attention as a part of the alternative investment class.

Investors locally can access these investments via various funds offered by local financial service providers. But make sure you’re happy with the terms. For example, many have lock-in periods of three to five and, in some cases, seven years during which you can’t sell, or can only sell at a price below the NAV.

You also need to ask about the exit strategy. A private equity fund is great, but what happens at the end of the period? How will it realise the profits? This would have to be through selling the asset, and then the question is: how easy will this be?

The fund managers themselves are important. What experience do they have in the alternatives space — have they had other successful alternative asset funds that prove a track record?

What about fees? They are generally higher here, but often wrapped into the fund pricing, so not always easy to spot.

You can also get fancy with the structured products that most of the banks issue either on the JSE or via financial advisers. These may just hold a simple S&P 500 exchange traded fund, but can offer downside protection and enhanced upside returns — again with lock-in periods and limited liquidity if you want to exit early.

Impact investing, pioneered locally by Fedgroup, is another alternative for those wanting direct exposure rather than through a fund. While this increases the potential, it also increases risks due to a lack of diversification, though you can diversify it yourself.

One easy solution is listed actively managed certificates (AMCs). The GIM Liquid Private Credit AMC invests in private credit funds in the US, and we can buy it via our JSE account in rand, making liquidity less of an issue.

Importantly, your retirement fund likely has a fair bit of alternative assets, especially in the form of renewable energy investments. So you do have some exposure, albeit probably limited.

I like the alternatives asset class and am looking to add more of it to my portfolio — but cautiously. I also prefer JSE-listed options as these add an extra layer of regulation. But, that said, we do have some excellent local fund managers with long track records of successful funds that are worth a look.