South African investors are, compared with the US and Europe, under-invested in alternative asset classes. This is partly due to perceived complexity and perceptions of high risk. But, say the experts, returns are adjusted for increased risk. While not easily accessible in South Africa, there are various ways for local investors to increase their exposure to non-equity asset classes.
The poor performance of the JSE this year has made the prospect of spreading investments over non-equity asset classes increasingly appealing. Alternative investments in hedge funds, private equity, venture capital, infrastructure and non-listed property, among others, spread the risk and in some cases these asset classes have been outperforming equities.
But alternative investments are not easily accessible to private investors in South Africa, and the choices are few. There have been a number of regulatory changes to facilitate increased investment in alternative assets, although none of them come cheap.
These include the recognition of hedge funds as collective investment schemes, and efforts to boost investment in Section 12J venture capital funds, which are tax deductible.
In 2011, the Pension Funds Act increased the threshold for investment in alternative assets to 15% from 2.5%, opening up alternative investment opportunities for fund managers and, indirectly at least, their individual investors through retirement funds.
But on average, institutional investors and pension funds are probably sitting with an allocation below 2%, says Pawan Singh, head of multi strategy at Sanlam Alternative Investments. “The number is close to 30% in the US and Europe.”
SA’s low participation reflects the fact that equities have traditionally performed well, and that the alternative investment market is small and, relatively speaking, in its infancy.
Singh says the lower allocation in SA can be attributed to lack of education about alternative asset classes, perceived complexity, and perception of high risk, “despite the superior risk-adjusted returns”.
In addition, “traditionally high inflation-beating returns from listed equities and property hasn’t necessitated the inclusion of alternatives”.
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