All throughout history, from the backdrop of the classic times of Ancient Greece and the later Roman Empire, two main assets have been a static constant. A constant as a measure of value, an investment, a medium of exchange, and even extending into modern times as being what many individual investors understand best and gear their strategies towards. These assets are gold and real estate. In the context of this modern economy and asset class based investing, they are classified as alternative investments and over the next few weeks we will take a deeper dive into the diverse array that alternative assets are, starting with the hard assets that mainstream investors have been buying for centuries: gold and real estate.

Alternative investments is an all encompassing term. It characterizes any asset outside of conventional stocks, bonds and cash. As a result, one can’t  analyze alternatives on a whole, but look at each of them individually. How they perform in combination with other alternatives as well as with core, traditional investments is a whole graduate school course of material. Regardless, investors can pick from a range of alternatives to help serve three main purposes that are increasingly crucial in the low growth, low or negative interest rate environment that presents itself today. First, alternative investments can be used to enhance the yield of one’s portfolio. In an environment where the stock market is increasingly volatile and the underlying economy is showing weak signs of growth and consumer confidence, specific alternatives such real estate, as well as some other alternatives such as private equity and infrastructure can provide the investor with income and dividend payments that are not correlated to their public market holdings. This characteristic further consolidates the role of some alternatives as a hedged, yield enhancement mechanism for the portfolio.

Stemming from this, gold and to a lesser extent, real estate among many other alternatives such as other hard commodities land-based investments such as shopping malls or airports are assets that serve as a perpetual inflation hedge for an institutional investor. A testament to this fact is that a gold coin has largely held the same amount of purchasing power all throughout history and a perfect example of this is how it could buy items of equivalent utility for an Ancient Roman man, similar to that of one in the modern era. A gold coin, measuring one ounce, could buy a toga and sandals within a bazaar for a man of Ancient Rome in the same way as one today, currently valued at just over $1800 US dollars could buy a modern man a suit and leather shoes. For this reason, investments such as gold, which are historically safe haven holdings that balloon in value when all is uncertain, are the tools the portfolio manager needs to ensure they hit their target yield. For example, while the VIX is continuing to hit all time highs and news of the Fed purchasing mandates subsides causing the stock market to pull back, the price for one oz of gold has just pushed past $1800 USD, further signalling levels unseen since the uncertainty and market decline of 2008. In addition to this, real estate, which as the old saying goes, is forever, is similar in the sense that its utility and therefore, the intrinsic qualities for which it derives its value, do not change and are irrespective of the external value assigned to it by the market, therefore proving both these assets a reliable, inflationary hedge at the portfolio manager’s discretion.

Third, the uncorrelated exposure that alternatives such as gold and real estate bear to that of the public stock and bond markets are another value add for investment managers. In a market where investors such as pensions or endowments must aim for a long-term return target in the high single digits, bets that are in line with the ever more volatile stock market are increasingly outside the scope of their strategy. Assets such as real estate, which are often lagging behind large swings in the economy and pay the aforementioned income to their portfolios are progressively becoming more in line with their obligatorily careful investment strategies.

The returns on these assets must be skill based, gone are the days of real estate being an investment that only went sky high; as a result, fund managers must take every step to ensure the use of skill in picking their alternative assets, a pension looking to add income to their portfolio must choose the right land based investment, whether a shopping mall, office building or an infrastructure based alternative such as a pay-for-use highway or canal, skill is the key in making these additives worthwhile. While this does sound like a given, the note here is that with the vast array of alternatives that exist, the investment thinking and skill-based approach to gaining exposure within this asset class is fundamentally different to that of conventional markets like going long stocks and bonds. Investors will be required to think more laterally and take into account different factors than usual. In the context of gold, an example is the kind of decision that presents itself to investors looking to invest; should they invest in gold stocks? Private gold companies? Buy a mine? Hold debt of gold companies? Or buy physical gold? And even then there are multiple ways in which they can do so, should they buy Coins? Bars?, the list goes on and in conclusion it is because of that plethora of ways to gain exposure to different alternatives that should an investor, retail and institutional alike, choose to do so, that they take every step to ensure a well thought out and researched approach that places an emphasis on skill based investing rather than speculating. Thank you for reading and please join us in a week for the next edition of this series that will focus on private equity and debt investments within the alternatives space.