How to design your alternative asset investment strategy

Posted on
26th July 2021
By Mark Sherwood

How to design your alternative asset investment strategy

15-20% in alternative assets makes sense for investors. (By Mark Sherwood, 26th July 2021)

It is a given that Australian SMSF investors will continue to have reasonably high percentages of their SMSF portfolios allocated towards listed equities and property, this is likely to exit almost irrespective of price valuations.   However, there are a couple of changing dynamics for SMSF investors that are currently occurring.  In regards to equities specifically and general broad-based gains that have been made over the last twelve months, SMSF investors are reassessing their sizing and potentially “taking some profits off the table” where it can make sense for them, given the uncertainty that now exists with this economic downturn being longer than we all would have expected twelve months ago.    

Along with such a reassessment of existing exposure percentages, what has also changed significantly for SMSF investors who are designing or currently adjusting their allocation strategies in light of this “near zero” interest rate and “prolonged” Covid-19 world, has been allocations towards cash, term deposits and fixed interest securities.  Whilst holding reasonably high levels of cash provides an investor both a safety buffer as well as an opportunity to move swiftly when opportunities arise, the very small returns being generated means there is an increased opportunity-cost in holding high levels of cash and deposits, if that capital could have been invested in higher-yielding solutions.  This dynamic also exists with some fixed interest holdings as well where yields being realised have decreased substantially. 

The alternatives asset category for investors extends across a number of different asset types, meaning the risk exposures and any subsequent correlation levels can vary greatly between individual assets.  Private credit, asset-backed corporate debt, real estate lending, infrastructure, agriculture and private equity can all form examples of the category.  Given such diversity exists just within the alternatives category itself, it provides merit for a potentially larger percentage allocation than may have historically been held by SMSF investors, when they are assessing their portfolio allocations.  For a guide, if the largest institutional investor allocations from some of our country’s biggest investors are used as a guide this would place the alternatives category weightings in the 15 to 20% category of portfolios.