advertisement
Columnists

Alternative investments are the next major growth story

Nairobi Securities Exchange
Nairobi Securities Exchange (NSE). FILE PHOTO | NMG 

The Covid-19 scourge is leaving a trail of destruction in global stock markets.

At the time of writing, stocks in Europe, the Middle East and Africa (EMEA) have lost nearly 20 percent year-to-date in US dollar terms.

In America, the S&P 500, which is a market cap weighted index of the 500 largest US companies, has shed nearly four percent since the year began (which compares unfavourably to the 29 percent it delivered in 2019).

Domestically, the benchmark NSE-20 share index lost 27 percent of its value in the first half of the year and domestic stocks could be headed for a disastrous close.

Away from stocks, returns on fixed income securities have remained soft. The Kenya government recently paid under 12 percent to borrow for five years; while earlier on in the year, it paid under 13 percent to borrow for 15 years.

advertisement

For a government that is adding billions of shillings to our budget deficit and national debt every day, borrowing at such rates is the height of ‘paying less for more’.

And there are indications it could continue paying less for long-term local currency borrowings. This is not good news for people who rely on markets to accrue future wellbeing such as pensioners.

Moreover, such returns may also mean investors’ wealth diminution. The key question then, is how can investors hedge their interests from further diminution. The answer may lie in alternative investments.

By definition, there is still no consensus on what constitutes alternative investment as it remains a rapidly changing field and consensus will probably remain elusive. But usage of the term in the world of investing is growing.

Generally speaking, alternative investments are sometimes viewed as including any investment that is not simply a long position in traditional investments. In strict sense, traditional investments include stocks, fixed income securities and cash.

For instance in 2018, Kenya’s pension funds’ investments in fixed income accounted for 43 percent of their investment portfolios, while stocks, immovable properties and guaranteed funds accounted for 17 percent, 20 percent and 14 percent respectively of their portfolio.

In total, these four asset classes accounted for 94 percent of total investments and can, therefore, be viewed as traditional.

However, returns haven’t been quite impressive. Between 2018 and 2019, yields on fixed income investments averaged 12 percent while the benchmark Nairobi Securities Exchange (NSE) 20-Share Index lost 28 percent of its value.

Property values, on the other hand, have seen the slowest annual growth momentum over the past three years. For pensioners, returns from traditional investments will be unable to alleviate retirement poverty.

That is to say, with a traditional allocation, pension fund portfolios struggle to generate returns that can decently replace pre-retirement income.

Alternative investments can, therefore, be the catalyst for portfolio growth. Some alternative platforms have done well. For instance, MansaX, a multi-asset fund by Standard Investment Bank, said it delivered 24 percent in the first half of the year, which more than outperformed traditional strategies.

Multi-asset funds tend to derive their outperformance from their composite nature as they invest in several asset classes: currencies, commodities, stocks, precious metals and derivatives. They also bet on both sides: that prices will go up and/or down.

In fact, going long and short in every asset class presents them with an upside whether the market is losing or gaining. They also provide sufficient liquidity by investing in near-cash instruments.

A key feature of alternative investment is such that they have to answer to liabilities as they fall due. As the Covid-19 pandemic continues to create overhang in markets, investors should look to alternative investments to deliver alpha.

advertisement